IMF Throws Ukraine a $4 Billion Bone

Ukrainian President Poroshenko pictured in 2015. Wikimedia Commons.

With fiscal assistance frozen for months and set to expire soon, Ukraine agreed on October 19 to a new $4 billion stand-by arrangement (SBA) from the International Monetary Fund (IMF). Such loans serve as a further incentive to aid the country’s thus-far stagnant progress on economic reform.

This new agreement marks the next step in Ukraine’s well-established history of falling short of the IMF’s reform standards. As early as 2010, the IMF froze a $15 billion loan to Ukraine because the country refused to remove its subsidies on gas prices. Almost a decade later, Ukraine still finds itself stubbornly debating the same reforms. Lifting the subsidies on gas prices would greatly increase the currently low rates, and the move, therefore, remains unpopular among Ukrainian citizens.

One reason for this stubbornness is the upcoming Ukrainian elections in March 2019. President Petro Poroshenko fears losing favor with his base. His electoral competitor, Yulia Tymoshenko lashed out at Poroshenko as soon as a November hike in gas prices by 23.5 percent was announced. She accused him and his government of cruelty to Ukrainians.

Ukraine finds itself in dire need of the reforms suggested by the IMF in order to achieve sustainable growth. The Ukrainian economy teeters on the brink of a debt crisis, and IMF funds were frozen amid dangerously high inflation. While the central bank has raised interest rates to combat further inflation, the only foreseeable escape is through new IMF aid.

The IMF’s statement on the 14-month SBA with Ukraine outlines inflation-reduction as one of the primary incentives, alongside strengthening “tax administration, the financial sector, and the energy sector.” Under the new borrowing conditions, Ukraine will have greater discretion to undertake reform, so long as gas prices rise. This differs from the discretionary lending of the previous 4-year package set to expire in 2019, which was not an SBA but an extended fund facility (EFF).

On the international stage, the agreement is viewed favorably. The G7 Ambassadors’ Support Group tweeted to express its support and welcome the staff-level arrangement, marking it as “a key step towards ensuring Ukraine’s future economic stability and continued economic growth.”