I never assumed the International Monetary Fund would drop the requirement of passage of the agricultural land law or the banking law in order for Ukraine to get a renewed multibillion-dollar loan program.
But the vote in parliament that will hopefully take place at the weekend could well be close as oligarchic vested interests line up in the Verkhovna Rada to try and block IMF cooperation. These forces don’t want the IMF to have oversight as they want to continue with their corrupt, rent-seeking practices. And the banking law is a bigger issue for these forces, as it implies banks don’t go back to former owners, no compensation, and still the risk that former owners are pursued for some of the $15 billion lost in the 2015-17 banking crisis.
These same forces were previously saying that Ukraine does not need IMF money as it could finance itself from the market – but with uncertainty around the cabinet reshuffle and then COVID-19 that avenue has been cut off. Now they are saying Ukraine just cannot pay its debt liabilities, and that default is fine. They really are idiots if they think this, and let’s hope that President Volodymyr Zelensky does not listen to these clowns.
Default as a strategy would set Ukraine back a decade – and Zelensky would be President Viktor Yanukovych II in my mind if they go down that path. Default means currency devaluation again, a risk again of bank failures, again…the old script.
After all the achievements on the economic policy front since 2015 does Zelensky want to put Ukraine in a serial defaulter camp with the likes of Argentina and Ecuador, with the price being higher borrowing costs for government, banks and corporates in perpetuity. The price then would be lower growth, less investment and jobs.
Yeah sure some robber baron oligarchs would win in that scenario, as they historically have been adept at managing/muscling their way through these scenarios where they set the rules. But ordinary Ukrainians would be the huge losers again, and the flight of young talented Ukrainians out of the country would accelerate.
There is debate about the size of IMF and official financing. Talk is of an $8 billion program, which presumably is made up of $1.4 billion in the emergency loan and $6.6 billion in a new program. The Ukrainians will want a substantial part of any monies to be front loaded, and I guess with COVID-19 hitting hard, a good case can be made there.
Generally I am assuming a hit to GDP growth across emerging markets of 5-7%, and budget deficits blowing out 5% plus, if 2008/09 is anything to go by – which might mean a budget deficit of 6-7% of GDP in Ukraine’s case. That would leave a big hole in Ukraine’s budget financing story. I think a decent case can be made for disbursement of $2.5-$3 billion up front, assuming the banking law and land reform bill are passed. Obviously this will also trigger the release of 700 million euros in European Union support, and other additional official assistance, which could give Ukraine a decent war chest to cover the heath and economic costs of the current crisis.
But I still think it is important that the Zelensky team recognize the importance of the prior actions and structural benchmarks contained in the original IMF agreement. There has been very significant backtracking around rule of law based issues under Zelensky and that bodes ill for the business environment in Ukraine. Zelensky needs to realize that he is being cut some slack from the IMF and official creditors because of COVID-19 but he needs to deliver on the structural reform agenda if Ukraine is to emerge quickly from the current crisis and get back on a strong growth path.
