On April 30, 2014 the International Monetary Fund (IMF) provided Ukraine a two year, $17.1 billion standby loan, justified at the time as necessary to stem the country’s accelerating economic decline. In exchange, Ukraine turned over the macro-management, restructuring, and the future of its economy to the IMF.
Today, six months later, it is reasonable to ask how Ukraine’s economy has fared in the interim? How has the IMF plan performed thus far? And what are the prospects for Ukraine’s economy in the months immediately ahead under continuing IMF management?
For the six quarters (18 months) prior to April 30, 2014 Ukraine’s economy declined 1%-3% every quarter except one. In the first three months of 2014 its GDP fell another -1.1%. But since the IMF deal was signed in April, the decline has accelerated: In the April-June 2014 period Ukraine’s GDP fell a more rapid -4.6%. GDP figures are not yet available for the most recent, July-September 2014 period, but it appears very likely the economy is now deteriorating even faster.
For example, according to World Bank data, while industrial production fell -5.8% in the first half of 2014, in July and August its decline accelerated to -12.1% and -20.1%, respectively. Other key indicators of the economy reveal a deterioration from January through August, especially business investment (-25.6%), construction (-15.6%), trade (-13.8%), exports (-14.4%) and imports (-21.2%). Those figures do not yet include the two most recent, and no doubt even worse, performing months of September-October.
During the same January-August period, inflation also rose by 20%, Ukraine’s currency plummeted by 36% (the most globally of any economy), and Ukraine central bank’s foreign currency reserves—needed to stem its currency collapse, to finance desperately needed exports & imports, and to provide essential credit to its increasingly fragile private banking system—began evaporating. Foreign reserves fell $4 billion in October alone, to a nine year low of barely $12 billion. With currency, reserves, and credit all collapsing, capital flight continues to intensify, recently prompting Ukraine’s government in desperation to impose a $200/day limit on withdrawals.
Last April the IMF assured its initial $17.1 program would result in only a -5% fall in Ukraine’s GDP this year, with a return to 2% positive growth in 2015.
However, an IMF preliminary review in mid-July of the program’s progress concluded that while “all performance criteria and benchmarks were being met” nonetheless, along a number of fronts the economy was deteriorating rapidly. The IMF therefore raised its GDP decline estimate to -6.5%.
In August, as the economy continued to further deteriorate, the IMF revised its April estimate again, predicting a -7.3% decline in 2014 and this time a -4.6% in 2015 instead of 2% growth.
An indication of just how fast the economy has been deteriorating, just last month, in early October, the World Bank raised that number to an -8.0% GDP drop for 2014. The Bank noted an even worse scenario was likely, if gas prices continued to rise in 2014(which they will with the onset of weather and the recent Ukraine-Russia gas deal) and if military conflict continues in the eastern regions (which has been intensifying anew). The only growth sector of the Ukraine economy is government military spending, as it battles separatists in its eastern Donetsk-Luhansk regions.
Many economists considered the IMF’s initial April estimates for Ukraine absurdly optimistic, this writer included, who predicted last March that Ukraine’s GDP would collapse at least -10% to -15% in the coming twelve months; furthermore, Ukraine would need a $50 billion bail-out in the next two years, not the IMF’s $17 billion. That 8% GDP drop so far amounts to $14 billion reduction in Ukraine’s 2013 GDP of $177 billion.
To date, the IMF has only distributed to Ukraine $4.5 billion of the $17 billion. But that $4.5 billion disbursement has had little positive impact on Ukraine’s real economy and provides essentially no ‘offset’ to the $14 billion real decline to date.
A significant percentage of that $4.5 billion has already been paid by the IMF to itself and to western bankers for debt previously incurred. In fact, according to Bloomberg business, Ukraine has more than $15 billion in payments coming due between now and the end of 2015. One could logically argue that the IMF’s initial $17.1 billion will be used to pay back $15 billion.
Another part of the IMF’s paltry $4.5 billion disbursement to date is directed to Ukraine’s central bank, in order to try to stabilize Ukraine’s currency, the hryvnia, that has been in freefall for months. And yet another $2.7 billion disbursement, scheduled for later in 2014, will likely be used by Ukraine’s state owned gas company, Naftogaz, to pay Russia for natural gas through next winter, and for payments owed for past gas deliveries, both as part of an agreement recently reached with Russia’s Gazprom.
Concerning the impact of IMF policies involving natural gas, gas prices have already risen 50% for many consumers, devastating incomes and depressing consumption. But the other foot will fall after January 1, when subsidies to households, now covering up to 7/8ths of the cost for gas, will start being discontinued.
So most of the $17.1 billion original IMF deal has had, and will have, little positive impact on Ukraine’s real economy. The lion’s share of the $17.1 billion goes to service past debts to creditors outside the country. And what remains in funding, i.e. what doesn’t go to creditors, goes mostly to Ukraine’s central bank—i.e. to try to stabilize its currency, to finance external trade (exports-imports), and to replenish evaporating foreign exchange reserves. Meanwhile, gas policies, as well as government spending cuts, tax hikes on consumers, and other ‘fiscal’ measures in the IMF plan directly impact both household consumption and government spending.
The IMF’s $17.1 billion April loan is classic IMF strategy, designed to take over an economy and manage it in the interests of western banking and multinational corporate interests. IMF lending is foremost about ensuring interest and principal payments are made on schedule. The first priority is to provide loans to ensure repayments. Bankers get paid first, along with the IMF. Second priority is to provide the country’s central bank funds necessary to stabilize its currency. A stable currency is needed to encourage western foreign direct investment into the country, i.e. to buy up and take over its domestic industry. Third priority is to enable indigenous businesses and consumers to purchase exports to the country from the west.
Thereafter the IMF plan is to fundamentally restructure the economy so that social spending programs are cut massively and wage pressures are reduced on business as layoffs take place as part of restructuring to make business more ‘efficient’. Social program cuts and layoffs tame the working classes to accept lower wages and to work harder, increasing productivity, if they want to keep their jobs. Finally, the classic IMF intervention program aims to reduce the size of the government and the public sector, so that it doesn’t compete with private businesses for credit or directly in markets. Reducing government spending and deficits also creates more budget room for business and investor tax reduction. That model is precisely what occurred in Greece, Portugal and elsewhere in recent years. And it’s being implemented today in Ukraine.
Contrary to IMF assurances last April, nearly everywhere since April the Ukraine economy is declining at double digits rates—industrial production, investment, consumption, trade, currency values, foreign exchange, and now GDP itself. So the Ukraine economy is currently spinning out of control—not stabilizing as the IMF April 2014 plan and deal originally assured—heading toward the 10%-15% GDP collapse and the need for $50 billion in bailout.
The IMF itself has recently recognized the seriousness of the situation, indicating it may have to add another $19 billion in bailout. But that doesn’t mean it will provide it. Western Europe is descending into a third recession in five years and is in no mood to give more. And the USA is preoccupied with ISIL, Iran, and domestic politics.
Ukraine’s President Poroshenko recently toured European capitals and Washington with his ‘hat in hand’. He reportedly “gave the speech of his life and got $53 million. That funds the cost of the war in the East for 9 days”, to quote the USA newspaper, The Washington Post.
The IMF’s cover for the failure of its program in the Ukraine is to blame the accelerating decline on the continuing military conflict in the East and on the natural gas crisis, escalating prices, and growing Naftogaz debt. While military conflict has contributed, the scope and magnitude of the Ukraine economic collapse now underway is attributable to various economic forces well beyond the military conflict—not least of which is the IMF program itself.
The fact that the IMF continues to revise its economic estimates downward, almost monthly, and that it is raising the possibility of the need to provide as much as $19 billion more in bailout, is ample testimony of the failure of the program.
Meanwhile, Ukraine’s real economy and its citizens suffer severely as a result, with all indications that the economic crisis there will get worse, perhaps much worse, before it ever begins to get better.
Dr. Jack Rasmus
Dr. Rasmus is the author of ‘Epic Recession: Prelude to Global Depression’, 2010, and ‘Obama’s Economy’, 2012, both published by Pluto Press; and the forthcoming ‘Transitions to Global Depression’, by Clarity Press, 2015. His website is http://www.kyklosproductions.com and blog, jackrasmus.com.