Why Ukraine Needs IMF Funding
Kiev has an eerie feeling. The many construction projects have come to a sudden halt. A couple of weeks ago, cranes were turning all over the skyline of Ukraine's capital, but now they stand abandoned, as credit has dried up.
The International Monetary Fund (IMF) is close to giving Ukraine a fast and large credit to salvage its economy. It is badly needed. The banking crisis in the West might have been mitigated with enormous financial injections. Now the emerging markets call for their salvation.
Like many other emerging economies, Ukraine has delivered to its people a magnificent average growth rate of 7.6 percent for eight straight years. The government has been fiscally conservative. The budget has been close to balance for the last three years. The public debt is tiny at 10 percent of GDP. With international currency reserves of $37 billion last week, Ukraine is by no means bankrupt. The moderate current account deficit of 4.2 percent of GDP last year was more than financed by foreign direct investment.
Even so, the yields on Ukraine's Eurobonds have shot up to 20 percent a year, a level characteristic of countries in external default, as the global financial crisis has also hit Ukraine. While interbank markets have seized up in the West, many Western financial institutions are abandoning emerging markets. Regardless of its performance, a Ukrainian company can no longer refinance a foreign loan and is forced to close down when a large loan falls due.
Since July, the prices of many commodities have fallen by half, as is the case with steel, Ukraine's main export. The steel companies cut production drastically, by 30 percent last month, and are laying off workers. Falling steel exports are aggravating Ukraine's trade deficit.
But most of the economy can be saved from financial collapse. Ukraine's exclusion from international finance is a market failure that only the state can resolve, and in this international context, the IMF represents the state.
The Ukrainian government has faced up to the situation and asked for emergency credits from the IMF, and the IMF management has responded swiftly and positively. The Ukrainian ministry of finance and central bank are working around the clock with the IMF mission in Kiev to conclude a program. This crisis is reminiscent of the Asian financial crisis of 1997–98, and the IMF has opened speedy emergency funding established then.
The IMF needs to do two things. First, it must check that Ukraine's economic policies are solid and issue its approval. Late Saturday night, I met Minister of Finance Viktor Pynzenyk in his office in Kiev, after his latest IMF negotiations, who made clear that an agreement is within reach.
Second, the IMF needs to open a large credit line of some $20 billion to restore confidence in Ukraine's financial well-being, just as wealthy Western governments have intervened at home.
Speed is vital. Every day, Ukrainian companies fall off the financial cliff for no good reason. Their only fault is that they have taken a foreign loan. The slightest delay in an IMF agreement can lead to a run on the Ukrainian currency, the collapse of the Ukrainian bank system, mass bankruptcies, a double-digit fall in output, mass unemployment, and undoubtedly political unrest. But none of this is necessary. It can and should be avoided.
Ukraine's quarrelsome politicians seem to realize that their nation is in danger and to be ready to swallow the bitter pill of an IMF emergency program. They also need to take this opportunity to promote long-delayed reforms, because Ukraine will suffer badly in any case.
Several other emerging markets, such as Pakistan and Hungary, are in a similar situation and also need IMF support. What is true for Ukraine is also true for them. Many other countries should come to the fore and receive financial support on due conditions in time.
Fortunately, most emerging economies have entered this crisis with strong state finances and sound macroeconomic policies, rendering fast assistance feasible. Remember, an IMF loan is not a gift, but it is paid back within several years. Like the East Asians, the current IMF clients will be able to pay back.
After a long rest, the IMF is badly needed. Today, its challenge is to act fast enough and to make sufficient funds available for emerging economies in danger.