IMF Package to Ukraine Should Include Real Economic Reforms

International Monetary Fund (IMF) officials beat the U.S. to the punch this week, arriving to discuss economic aid to Ukraine one day earlier than U.S. Secretary of State John Kerry. While Kerry promised $1 billion in loan guarantees from the U.S., the IMF is working on a $15 billion loan request from the Ukrainian government to help repair a leaky economy.

The Ukrainian economy is certainly in dire straits. The currency, the hryvnia, has fallen nearly 16 percent since New Year’s, raising the fear of inflation. Prices of Ukrainian bonds have also risen on fears of a sovereign default. This situation was compounded by revelations today that Gazprom, the Russian state-owned gas company, would raise rates after Ukraine failed to pay its debts in full.

Certainly the IMF loan would go a long way to plugging the gaping current account and fiscal deficits. But so far, the IMF’s loan has had a clear geopolitical element to it—and rightfully so, as the U.S. and European Union jockey with Russia for influence in Ukraine. However, if the IMF really wants to ensure the long-term durability of the Ukrainian economy, economic reform should be emphasized as well.

Reform should start with the IMF loan itself, which should focus on setting the Ukrainian economy on a sustainable path. A first move would be to liberalize the hryvina. Maintaining a managed exchange rate, which the National Bank of Ukraine has tried to do throughout the crisis, has only drained foreign currency reserves. Letting the exchange rate float would help ease current account pressures and preserve what reserves are left.

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Second, the government and IMF should tackle wasteful energy subsidies. Naftogaz, Ukraine’s huge, corrupt state-run energy company, has received more than $6 billion in subsidies since 2009. The IMF should address these costs by considering privatization, a move that could ease unsustainable pressures on state finances. Additional subsidies, including local subsidies to the residential energy sector, make up over 7.5 percent of gross domestic product, according to the IMF. These should be rolled as well to reduce overconsumption and resource misallocation.

The U.S. could help as well. Currently U.S. companies can export natural gas only to countries with which the U.S. has a free trade agreement—and Ukraine isn’t one of them. President Obama could waive this requirement and legalize natural gas exports to Ukraine. This would, at first, be only a symbolic gesture, but in the future it could help wean Ukraine from its energy dependence on Russia.

The IMF is currently playing a part in the geopolitical game surrounding Ukraine—and for good reason. But its success should not be measured by the size of the package or by the geopolitical outcomes. Instead, it should be measured by the effectiveness that its terms have on helping Ukrainians liberalize their economy based on the principles of economic freedom.

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