The actions of the Ukrainian authorities to accept excessive and not always prudent commitments to the IMF cause a great number of questions about the level of professionalism of these authorities.
A week ago, on November 22, 2021, the Executive Board of the International Monetary Fund (IMF) agreed on a report on the results of the first review under Stand-By Arrangement with Ukraine and approved a Memorandum of Economic and Financial Policies of Ukraine supported by the IMF program.
After a while, the media learnt the details of the Memorandum, which invited many questions. Tetiana Bogdan, Scientific Director of the Growford Institute, shared her thoughts on this agreement with Comments.ua. Ukraine, pushed to the margins of world civilization, should not expect improvement and access to the main path of development.
The official goals of the program are:
a) returning fiscal policies to settings consistent with medium-term debt sustainability while protecting the socially vulnerable;
b) safeguarding central bank independence and focusing monetary policy on reducing inflation;
c) ensuring banks’ financial health with the goal of reviving bank lending to the private sector;
d) tackling corruption and pushing forward with the implementation of judicial reform;
e) reducing the role of the state and vested interests in the economy to improve the business environment and attract investment.
In fact, the IMF program is more focused on narrowing aggregate demand in the economy and overcoming macroeconomic imbalances, which, in turn, should ensure macro-financial stability and external sustainability of the economy. On the other hand, the fundamental drawback of the IMF program is ignoring the problems of the real economy sector problems, its low competitiveness and structural degradation, which does not create a solid foundation for macro-financial stability.
In my opinion, it is inappropriate to equate the state with vested and oligarchic interests in the text of the Memorandum, as well as to give them the status of entities that worsen the business environment in the country and undermine the economy’s potential. The program suggests reducing the share of the state in GDP (namely, expenditures not related to the debt interest payment) by 3.4% of GDP for 2022-2025. This is at the time when the world community recognizes the need for active public policy to adequately respond to the post-COVID challenges (in particular, investing in education and health care; improving the social protection systems; promoting the redirection of labor and capital towards digitalization and the transition to a climate-neutral economy. That is, for Ukraine, pushed to the margins of world civilization, there are no chances for improvement and access to the main path of development.
Useful Institutional Reforms have been included into the IMF Arrangement
However, the IMF also recommends some useful institutional reforms for Ukraine that will reduce the influence of the corrupt elite and increase social justice:
– completion of the audit of the budget program for COVID-related spending and publication of audit results by the end of 2021;
– improved social assistance programs to create a well-targeted and affordable social safety net that can effectively support poor and vulnerable households;
– publication by the Prosecutor General’s Office of a semi-annual report on the outcomes of criminal proceedings against former bank owners, managers in each resolved bank, with aggregate data on the number of persons investigated, tried and the amount of damage recovered;
– use of confiscated foreign exchange assets to make FX payments or transfer to international reserves at the NBU;
– ceiling on Publicly Guaranteed Debt and ceiling on the stock of arrears of the “Guaranteed Buyer” to the Renewable Energy Sector.
What blind compliance with the requirements of the Memorandum can lead to.
On the other hand, commitments of the Ukrainian authorities to fully liberalize the gas and electricity market for household needs invite logical objections. In particular, the Ukrainian government has committed not to reintroduce any price cap on gas supplied to households, and to ensure that wholesale prices are determined on a transparent and efficient market. According to the Memorandum, all heating tariffs should be reviewed to fully reflect all costs (including market gas prices and capital expenditures) by end October 2021, and subsequently officially enacted.
However, many years of mantras about market prices for gas do not take into account the obvious fact that market prices cannot exist in an economy where the state guarantees a significant part of demand for this gas by paying multibillion-dollar budget subsidies. A logical question arises: why should “market prices” for Ukraine be set at the level of European hubs, and not prices in poor countries with a significant share of their own gas production? These questions remain unanswered, and blind compliance with the Memorandum in the face of record world energy prices could provoke mass social unrest in the country and trigger political destabilization.
Tighter fiscal and monetary policy requirements have once again been imposed on Ukraine
The current IMF program, like all previous programs, is based on the implementation of restrictive fiscal and monetary policies. In the macroeconomic context, such combination not only reduces domestic absorption in the economy, thereby improving Ukraine’s external position, but also slows down the impulses from demand side to revive domestic production.
For example, the program suggests reducing the general government deficit in Ukraine to 3.4-3.5% of GDP in 2021-2022. These figures contrast sharply with budget deficits in other countries. Similar indicators in emerging market economies are 6.6 and 5.8% of GDP, and in advanced countries – 8.8 and 4.8% of GDP. Premature withdrawal of anti-crisis fiscal support is unjustified, as the recovery of the national economy has not yet become sustainable, and the epidemic situation in the country can hardly be called controlled.
In the latest Fiscal Monitor, IMF experts recommend all member states to avoid an early withdrawal of anti-crisis fiscal support programs and argues for the need to focus fiscal policy to overcome the economic and social fallout of the pandemic in countries where vaccination rates are low, or to support sustain the recovery with positive structural changes where widespread vaccination has been achieved. The requirements of the Memorandum to focus Ukraine’s monetary policy on returning to the 5% inflation target and ignoring the state of the economy are also prejudiced and detached from the global context.
As in the Global Financial Stability Report, IMF staff note that the abrupt tightening of monetary policy could undermine the economic growth. Therefore, the IMF recommends the central banks of different countries to walk a delicate line between supporting economic recovery and responding to inflation. It is also noted that if inflation expectations are “well-anchored”, central banks can ignore temporary inflationary factors and avoid tightening monetary policy. But as we can see, standard recommendations of the IMF do not apply to Ukraine.
Therefore, tighter requirements in terms of fiscal and monetary policy have once again been imposed on Ukraine, which will slow down the recovery of the national economy after overcoming the coronavirus crisis. However, it is very difficult to blame one side, the IMF, for such results.
The IMF, in accordance with its mandate, must protect us from the balance of payments crisis and guarantee ability to service debts, which it has been doing for 2.5 decades. Nevertheless, the actions of the Ukrainian authorities to accept excessive and not always prudent commitments to the IMF cause a great number of questions about the level of professionalism of this government and its desire to defend national interests.