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2 May, 2016

“It’s still not clear that Ukraine has the will to put durable reforms in place”

Former deputy director of the IMF’s European Department on the Fund’s cooperation with Ukraine in the past and present, why international creditors distrust Ukraine, and about the role of international lending in Ukraine’s economy

Interviewed by Anna Korbut

Back in 2014, you seemed fairly critical about the IMF’s exposure to Ukraine. What is your opinion on that now?

My position at that time was that the IMF was taking very big risks with Ukraine. It’s appropriate that the IMF was involved with Ukraine. It knows well how to advise governments on achieving macroeconomic stability – and that is what Ukraine needed immediately after the chaos that came a couple of years ago. The IMF was the organization to do it.

However, I was not convinced that the IMF should have been exposing itself financially on the scale it was – USD 17bn was a very large amount for the IMF to provide in financing for the program, and too much risk for the IMF. Typically, the Fund requires strong commitment to its policy, as well as a track record – something that persuades it that the government is able to carry out the reforms it promises. That was not there.

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It doesn’t mean that I think the IMF shouldn’t be involved with Ukraine. I think it should, but with a smaller amount of money. And between the US and the EU at least USD 17bn, but probably quite a bit more, should have been committed at the same stage as when the IMF finalized its program with Ukraine.

I don’t think the IMF’s money should have been put at that risk. The decision to proceed quickly in those very risky circumstances was to a large extent made for political reasons:  those governments wanted to support Ukraine at a difficult time. But it wasn’t the role of the IMF to expose its resources that way. Even now, I’m probably not alone in saying (although nobody will really voice this) that the IMF’s resources are significantly at risk in Ukraine – at more risk than the Fund should normally take. It’s still not clear that Ukraine has the will to put durable reforms in place. Without them, there will be no strong and durable recovery.

Could you expand on Ukraine’s poor track? What were Ukraine’s failures in cooperation with the IMF that turned it into an unreliable cooperation partner?

Since the mid-1990s, when transition began, the IMF has had about eight or nine lending arrangements with Ukraine, and only one has been executed to completion.

The way the IMF works is that it lends money under a multiyear program of policies. For that period, the IMF commits to dispersing the given amount of money if the government carries out policy reforms – on the macro stability and the structural scales.

When a country undertakes a program with the Fund, the idea is that it will complete all the reforms and the IMF will disperse the money. What has happened in all except one lending arrangement with Ukraine in the past, is that Ukraine has done a reasonable job for the first six months, for a year or a year and a half, the economy recovers a little, and then the politics takes over. There is no more application of the program and the IMF stops the disbursements. That’s not how it should work. The IMF is supposed to go into an arrangement when it really believes that the country will be able to execute reforms and use all the money.

After the last aborted program that started in 2010, there was an expert assessment of it. This means that the IMF staff looked at the program to see what had been done and what hadn’t, and what the country needs to do should it come back to borrow from the Fund again.

Since the 2010 program went off track very quickly after it started, and because of Ukraine’s very poor record of executing the IMF’s programs, the Fund’s staff recommended that there should be more of a trial period in the future. In other words, the government would have to commit to doing certain reforms and show to the Fund that it can do these things. That didn’t happen in 2014 – for understandable reasons in many ways, because there were politically difficult times. Still, the IMF went into the new arrangement even though it was not taking its own advice as a result of the previous program that hadn’t worked. That is exactly the risk that is once again being faced right now: can the new government continue or not to honor its commitments.

Can you name successful examples in Eastern Europe where, by contrast to Ukraine, countries fulfilled the IMF’s requirements, and programs that were completed helped put their economies on track?

Poland, Estonia, Lithuania, Latvia, Slovakia, Czech Republic. There are also more problematic countries like Romania where programs worked sometimes, and didn’t at other times. But you have all these examples around Ukraine of formerly centrally planned economies. A good many of them have reformed and got themselves in a position where they don’t need the IMF any more, and can sustain growth and stable conditions.

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What were the major things those countries had or did, that Ukraine didn’t?

That’s a big question. There are a lot of aspects of differences between, say, Poland which is a big economy, and Ukraine. First of all, they did their macro stabilization in 1990-1992. They got inflation down, moved to more flexibility in exchange rates, got their budget situation under control, did debt restructuring, and had a reasonably moderate level of public debt. They did all the components of stabilization that Ukraine has started over the course of a couple of years, and then they sustained them until now.

Second, they had a wholesale structural reform – from price liberalization to judicial reform, reform of the tax system and expenditure programs. There were major structural reforms across the board that started in 1990 and continued.

One other thing that happened in Poland was that the promise of joining the EU was very real in people’s minds. So, pretty soon after the initial benefits of these structural reforms started to come to the population, people also understood that if they continued to pursue and deepen those reforms, they were going to get access to EU membership. That’s something Ukraine hasn’t had.

To sum it up, there are two things. One is basic leadership that stayed in place long enough to really cement structural reforms. These were leaders like Leszek Balcerowicz who rallied the population around the cause of structural reforms. And number two – the continuing belief that the reward for this was going to be membership in the EU.

Could Ukraine do without the IMF lending?

Right now, Ukraine is very dependent on the IMF for funding its budget deficit. The IMF funding together with that from bilateral official creditors, including the EU, the US, Japan, is probably the biggest contributor to financing government deficit in Ukraine. And the financing from these countries is dependent on Ukraine having the program with the IMF. The fiscal austerity that would be necessary if the IMF was not involved would probably be close to unbearable.

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Ukraine needs foreign financing. And given Ukraine’s track record no countries want to finance Ukraine unless there is some assurance in the form of the IMF program that the authorities are committed to doing the right things. 


Susan Schadler is currently Senior Fellow at the Center for International Governance Innovation, focusing on sovereign debt crisis, global capital flows, global financial institutions and growth models for emerging market economics. Previously, she served at the IMF for three decades. From 1999 to 2007, she served as deputy director at the IMF’s European Department, leading surveillance and lending operations to several countries and managed research teams working on European issues. 


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