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Will the IMF Lose Ukraine?

BOSTON – An incumbent trying to win an election in a stagnating economy must stimulate growth. This is one the most basic principles of modern politics. And yet the West, which wants to help its allies in Ukraine’s interim government win the general election on May 25, seems to have forgotten it.

Instead, plans are underway to impose on Ukraine the biggest austerity package Eastern Europe has ever seen. This is no way to win votes. After the Russian-imposed chaos, the International Monetary Fund is planning to inflict its own chaos on Ukraine. It is time to remind the IMF that political stability, not a controversial raft of emergency reforms, must be the top priority.

The IMF has long sought to impose a range of economic “reforms” on Ukraine. Some are reasonable; others are not – and the IMF’s track record in Ukraine is weak. Some of the reforms the IMF previously tried to get Ukraine to adopt, like pension privatization, were tried in other countries and ditched. The IMF does not always get it right. Today, its main blind spot in Ukraine has concerned consumer subsidies and transfer payments.

It is true that Ukrainian households need to be weaned off absurdly large energy subsidies, which amounted to 7.5% of GDP in 2012. But, in a cold country where most of the population needs heating subsidies to survive and massive investments are required to increase energy efficiency, abruptly withdrawing support to households is politically unfeasible. No government that cuts heating subsidies suddenly will survive. The subsidies must be phased out and compensated by targeted cash benefits – the Ukrainian government estimates that it will cost €100 billion ($139 billion) to fix its energy policy – and these reforms need to be enacted after the upcoming election.