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Ukraine Economy Could Collapse

Ukraine Economy Could CollapseUkraine Economy Could Collapse

The economy of Ukraine is a mess. By year’s end it will have shrunk by 10%. The east of the country, where the conflict with Russian separatists has raged, has seen billions of dollars’ worth of damage.

The West, despite big promises of help, has been woeful in its response. Unless there is a change of course soon, Ukraine’s economy could collapse.

The West’s main tool for helping Ukraine has been the International Monetary Fund (IMF). In April the fund agreed to lend Kiev $17 billion over two years, in return for an austere budget and reforms to curb corruption. Other donors pledged smaller amounts. This money, $27 billion in total, was deemed enough to avoid default and boost growth.

So far Ukraine has received about $7 billion, enough to stave off an immediate debt crisis, but not enough to rebuild an economy that has been hit far harder than anyone expected six months ago. The decline in GDP is twice as big as the IMF forecast in April. Consumers face ever higher fuel bills, private capital is fleeing and the currency is plunging. The hryvnia, which hit a new high of 16 to the dollar this week, has lost half its value this year. Back in August the IMF calculated that under an “adverse scenario”, Ukraine would need an extra $19 billion of funds in 2015. It is already worse than that.

The speed and tactics look more questionable, now that the economy is imploding. A million civil-service jobs, roughly a 20th of the workforce, are “under review”.

The IMF wants Ukraine to cut public spending from 48% of GDP to 45% by 2017, the same scale of belt-tightening demanded of Greece after its bail-out in 2010. A rethink is needed, with a bigger focus on debt, aid and infrastructure.

  Solution

Even though Ukraine’s debt burden has soared from 40% of GDP in 2013 to perhaps 70% now, both the government and the IMF still claim that it can meet its debt payments.

This is implausible. Since the prospect of a chaotic default will deter investors, Ukraine — with IMF support — should start negotiations to restructure its bonds now.

 And since that will not be enough, it will need more aid, probably at least another $20 billion.

Western governments should make clear, now, that they will furnish more funds. In particular, America could be more generous; it has so far delivered a measly $1 billion.

The focus of the reform needs to shift from budget cuts to boosting investment.

Financialtribune.com