IMF Board Welcomes Ukraine’s Fiscal Progress

With Ukraine’s rebound from the catastrophic recession of 2008-2009 well underway — if slowing — the International Monetary Fund has issued a report cautiously praising Ukraine’s recovery and the reforms it has made to its tax and pension systems. The report is likely a preview of the auspices under which the renewal of the IMF loan program — begun in 2010 and set to expire this year — will take place. President Viktor Yanukovych has made clear his intent to resume the IMF program as soon as possible; officials at the IMF are cautious.

As Bloomberg-Businessweek put it:

The IMF program is a “barometer” that shows the former Soviet republic where it has problems and where “everything is fine,” Yanukovych said yesterday. Disbursements to Ukraine were halted because the government failed to raise household utility tariffs, a move the Washington-based lender has sought to trim losses at state-controlled energy company NAK Naftogaz Ukrainy.

The sticking point — around which international media tends to dance — is that Ukraine is saddled with incredibly high prices for the natural gas it imports and on which its citizens and industry rely for heating and industrial use, and the IMF wants Kyev to cut its subsidies to Ukrainian household and industry to keep that price bearable. That price is unmentioned because it was unilaterally negotiated by former Prime Minister Yulia Tymoshenko.

Exploring this fact too closely would require most observers to note that Tymoshenko’s agreement to the natural gas price at issue not only doomed Ukraine to incredibly high energy bills, but also exceeded her power as Prime Minister; that, in turn, might suggest somewhat uncomfortably that whatever the problems in her prosecution, she is indeed guilty of abuse of office.

Without dwelling on the manner in which so many of Ukraine’s problems tend to come back to Tymoshenko’s last, disastrous turn as Prime Minister, it is worth noting that the IMF report itself is largely positive.

Executive Directors welcomed the progress made by Ukraine since the 2008-09 crisis, including the rebound in growth, and the decline in inflation and in the general government deficit. Directors also commended the authorities’ efforts to advance several reforms, particularly the approval of the pension law and the new tax and customs codes. They noted, however, that the country faces lingering vulnerabilities due to low reserve cover, large external and fiscal funding needs, and the difficult external environment. Directors stressed the need for strengthened policies and reforms to reduce these vulnerabilities, build buffers for domestic and external stability, and improve medium-term growth prospects.

Directors underscored that fiscal consolidation remains a priority. They welcomed the authorities’ determination to meet the 2012 deficit target and encouraged them to identify quickly contingency measures to safeguard against possible shortfalls. Over the medium term, continued efforts will be needed to strengthen public revenue, reform the public sector, and reorient spending towards growth-enhancing priorities.

The report also offers praise for the reform of the banking sector, along with cautionary notes about additional areas of needed improvement.

Overall, the report appears to be a cautious signal that the IMF is open to re-opening the loan program, even though gas subsidies will likely remain in place at least through 2013. Kyiv is working to bring its economic and public functions in line with Western norms, and despite years of cajoling and threats by Russia (almost all of which involve holding Ukraine hostage through the price of natural gas), has steadfastly worked toward the European Union rather than its old Russian Master.

The IMF doubtless understands this at some level. They also know another important truth: Russia is still out there.

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