News Column

As the IMF agrees a $17bn bailout for Ukraine, can this save the country's faltering economy?

May 2, 2014

YES John Lough The IMF bailout package is a lifeline for Ukraine, and will save it from immediate economic meltdown. Its finances are in a dire state after years of mismanagement. A large fiscal deficit has been built up because of populist wage and pension increases, as well as expensive energy subsidies. Ukraine's national gas company accumulated a substantial debt to Russia'sGazprom (it has now reached $1.9bn (1.12bn)). International reserves have dropped to $15.5bn, and the interim government has raised domestic energy prices and frozen wages. So things could get worse before they get better: the IMF is predicting a 5 per cent drop in GDP this year, followed by a return to 2 per cent growth in 2015. Ukraine has a poor record of implementing previous IMF programmes; the latest package is tied to progress on restoring the public finances. But the implementation risks are high, given the instability in the east of the country.

John Lough is an associate fellow at Chatham House.

NO Timothy Ash It's good news that the IMF has agreed to a $17bn (10.1bn) bailout for Ukraine. The administration seems serious about reform, and has rolled out some significant measures as prior actions for the bailout programme. All other things being equal, the bailout and reforms could be gamechangers for Ukraine. Crises often force positive change, and Ukraine could do similar things to what happened in Georgia under Mikheil Saakashvili - cleaning out petty corruption and transforming the business environment. But other things are not equal. Ukraine is facing a significant threat of civil war, separation and foreign invasion. If Russia takes the south and east of the country - not a low probability - then rump Maidan would struggle to be a sustainable entity, and Ukraine would likely fall into a spiral of devaluation, default and deep recession. Delivering on an IMF programme is not sufficient to ensure success for Ukraine.

Timothy Ash is head of emerging market research (ex-Africa) at Standard Bank.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: City A.M. (UK)

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters