IMF steps in on Ukraine, but a new loan strategy is needed

The International Monetary Fund’s recent announcement that it was giving Ukraine $17 billion in long-term loans, in exchange for promises of reform, was greeted with relief in most international circles. The collapse of the presidential administration in Kiev, and Russia’s annexation of the Crimea, have created an urgent need to shore up the country. But the IMF’s strategy of combining huge influxes of cash with sharp pressure to reform hasn’t been successful in the past. In the current crisis, it could be toxic. The IMF and the rest of the global community would have been better off providing shorter-term assistance to Ukraine without so many strings attached.

The failures of the past are well known. In 2008, the IMF lent Ukraine $16.5 billion in exchange for pledges to reduce fuel subsidies to a level the country could afford. In 2010, the IMF lent Ukraine $15.1 billion more. Both times, the Ukrainian government used the money to get by in a crisis. Both times, it rolled back its reforms as soon as the emergency passed. In recent years, Ukraine even increased subsidies and reportedly spent a whopping $14 billion on an international soccer championship. In effect, the IMF was like a parent who agrees to pay a child’s credit card bill, only to watch the child go on another shopping spree. The IMF got so angry that it issued an unusual statement in December announcing that big infusions of cash up front hadn’t worked. Smaller loans handed out gradually had a better chance of success, it said.

Given all this, it is hard to celebrate the announcement earlier this month that the IMF is going to lend Ukraine yet another $17 billion, in exchange for promises of economic reform, including lower fuel subsidies.


To be sure, the Ukrainian government needs cash badly. The country is facing an existential threat, as pro-Russian separatists in its highly industrialized east are threatening to break away. Moscow has jacked up the price of gas by 81 percent. And nationalist protesters in Kiev’s Maidan have vowed to continue their destabilizing revolution.

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But the severity of the crisis is precisely why Ukraine needs short-term grants, not long-term loans with strings attached. Removing fuel subsidies now would dramatically increase the price of gas for ordinary people. That could lead to unrest everywhere, not just in the east.

It would have been far better to assist Ukraine with flexible bilateral aid. Indeed, the European Union offered a $15 billion aid package to Ukraine, while the United States offered $1 billion in loan guarantees. But much of that funding comes in the form of World Bank assistance that won’t kick in right away. Some of the money is tied up in red tape, as countries refuse to pay Russia for Ukraine’s gas bill. In the end, only a few billion of that much-heralded aid package has actually reached Ukraine.

The IMF was left with the responsibility for filling the gap. But IMF loans are based on assumptions about economic growth, the price of fuel, and the level of political and economic stability — none of which are predictable right now in Ukraine. Passing off emergency assistance as a multi-year loan undermines the credibility of the IMF. Pretending that Ukraine can pay this loan back or abide by tough conditions in the near future could only serve to further destablize an already precarious situation.