The IMF’s false policies hit Ukraine

The Ukrainian economy has contracted in the two quarters of this year by roughly 15% on a year-on-year comparison while industrial production and export collapsed. The renewed IMF program will do little to bring the economy back on to its feet. It will not only fail to do good but risks producing an economic disaster similar to the disaster that has struck Greece. Policies that ignore the adverse effects of austerity on domestic demand, the unsustainability of debts and the politically fragile situation will cause further economic contraction and contribute to political instability and social injustice.

An opinion piece by Carolin Vollmann ITUC
August 31, 2015

Despite the failure of austerity policies to spur recovery in the last seven years in Europe the IMF’s overall strategy for economic recovery and growth remains the same – fiscal policies and changes in economic regulations that shift income from workers and their families to creditors, banks and business in the hope that “strengthening competitiveness and the business environment” will create confidence and spark investment creation and growth. However, the confidence fairy is a figment of IMF imagination in its Washington headquarters, not a phenomenon found in real economies. It is far from the reality of the Ukraine. Real businesses will not invest when austerity reduces demand and consumer incomes fall. Instead, as in Greece, the economy will contract until ... until even the IMF is forced to accept the facts on the ground and engage in yet another of its internal “what went wrong” assessments.

The IMF program for the Ukraine calls for public spending cuts to create “a smaller and more efficient government” and a “growth-friendly” tax system. It seeks to reduce public wages and public employment, lower the threshold for taxation so low income pensioners pay more, increase the retirement age for women and curtail early retirement despite the fact that life expectancy has hardly increased in the last 25 years. Health care will be further privatised and 5% of schools will be closed.

Looking at the evidence, IMF economists and researchers recognize the potential negative growth effect of austerity as being “self-defeating”. Also the local business community is worried. According to a recent national survey form the Institute for Economic Research and Policy Consulting, 62.5% of enterprises state low demand as their major concern. Among small firms the share is even higher.

Public resources are assured, however, “to support the rehabilitation of the banking system” which are projected by the IMF to total 9.25 % of GDP over the 2014/2015 period. Spending cuts are shifted to society and ordinary citizens. With more money the banks will supposedly give loans to businesses seeking to invest despite a collapse of domestic demand. Reality again is different. Interest rates have been as high as 27%, as the National Bank of Ukraine fights capital flight, inflation and a falling exchange rate. Confidence fairy? It is surely not sensible economics.

In January 2014 IMF managing director Christian Lagarde emphasized the beneficial role of the public sector for reducing inequality saying: “Think about making taxation more progressive, improving access to health and education, and putting in place effective and targeted social programs.” The political soft-talk and reality of IMF policies in Ukraine could not be further apart.

Another IMF policy dragging on ordinary people’s budgets is the blunt curtailing of energy subsidies which the IMF projected to raise the price for domestically produced gas by 355%. Indeed utility cost have increased dramatically in the first half of the year pushing inflation to almost 60% at the end of the second quarter according to the National Bank of Ukraine while average wages of 3,480 UAH (156 USD) declined by 6.5% in 2013. The IMF likes to stress their protection of “the most vulnerable.” However, the foreseen increase of utility subsidies of 0.3% of GDP falls short of the needed resources to seriously rebalance the effects for those who struggle and remains far below the reduction of subsidies of 1.1% of GDP.

The most striking similarity to Greece, however, is the unsustainable burden of Ukrainian debt. Due to the fall in the currency, external debts are expected to peak in 2015 at 158.4% of GDP, up from 102.4% of GDP in 2014 according to IMF data. The recently struck debt-relief deal between the government and private sector investors came as a positive sign. The agreement included a write-off of roughly 4 billion USD, a 4-year extension of repayments dependent on growth being above 3%. Whether it will be enough to bring Ukrainians debts to a sustainable level is in question given the IMF’s debt sustainable assessment, which is based on the assumption of creating 15 billion USD of fiscal space over four years. Further, one of the biggest creditor – Russia – has ruled out any debt cuts on a 3 billion repayment, due by the end of the year and some consider the 20% write-off low compared to the initial 40% target of the Ukrainian finance ministry.

Ukrainian’s political instability and corruption is a big impediment to growth. The share of companies that report this as constraint for growth increased to 58.3% at the end of 2014. According to Transparency International Ukraine ranks 142 out of 175 countries in terms of corruption, at the same level of Uganda and behind Nigeria and Lebanon. Rumour has it that even IMF money went into dark channels of private bankers, which should give the IMF a strong interest to strengthen accountability and democratic processes. Instead the program addresses corruption and “the business climate” by introducing legislation on investors’ protection, a reduction in the number of inspection agencies and an “enhancement” of the judicial system that increases court fees for civil litigation, translating economic inequalities into juridical injustice by closing the court rooms for those that cannot afford them. In sum, the IMF’s anti-corruption programme appears to be more concerned with limiting the rights of normal citizens than going after the officials making a living through corrupt practices.

The IMF programme in its current version of business-as-usual will almost certainly doom Ukraine’s economy to more increases in inequality and poverty with no way out. This, in a country that is not far away from war. A renewed approach has to start with a change in the process. The IMF has to broaden the dialogue and seek the participation of civil society organisations including trade unions for finding adequate solutions to complex situations. Only then can the Ukraine find policies that will create growth and serve the many not the few. Common sense about economic reality, not confidence fairy and austerity, is what the country and Europe needs from Madame Lagarde.