Will the IMF Lose Ukraine

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BOSTON –Mareeg,com- 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.

In addition, one-third of official income in Ukraine comes from government
“transfer” payments of various sorts, but mainly pensions paid to elderly women,
given that the country’s men rarely live much beyond the official retirement age.
These women often use their pensions to subsidize their children and grandchildren.
As a result, a majority of the country benefits from government transfer payments,
and many households cannot do without them.

Yet cutting them ahead of the election – or announcing sharp cuts – is exactly what
the IMF wants and what the interim Ukrainian government plans to do; in the words of
Prime Minister Arseniy Yatsenyuk, “We don’t have any other options.” Yatsenyuk may
be willing to sign away his political future, but the West should not let him do it.
Not now.

The IMF and Western governments need to give Ukraine some breathing room. Ukraine’s
economy was growing rapidly in the years before the global financial crisis, driven
by exports of basic industrial goods, such as steel. Any emergency financial package
must enable the government to survive through the May election and signal a
commitment to reviving economic growth.

The international financial institutions should then turn their attention to
crafting an aid package that does not require the budget to be balanced on the backs
of the poor. Instead of cutting consumer subsidies, the IMF could help Ukraine to
improve tax collection. More than half of the economy is unofficial and untaxed.
Oligarchs can be asked to contribute to any program as a condition of support for
their regions or industries. And the IMF can come up with clever ways to encourage
energy efficiency, for example, by designing a tax credit for households that
purchase high-quality heaters.

No successful Eastern European government has been asked to impose a dramatic
austerity and reform program prior to democratic elections; it would be utter folly
to start now. In Poland, the region’s star reformer, and elsewhere in post-communist
Europe, citizens were asked to make the sacrifices that economic reform requires
only after the government had gained a popular mandate.

Ukraine is still a step away from this politically. If the IMF insists that the
interim Ukrainian government impose austerity immediately, the country will be
forced to break uncertain new ground at a particularly dangerous time.

In short, the Western strategy for Ukraine should be to stimulate the Ukrainian
economy until the May election and then negotiate a package of reforms with the
government that emerges. Emergency economic reforms can wait two months; Ukraine’s
unity and stability cannot.

Mitchell A Orenstein is Professor and Chair of the Political Science Department
at Northeastern University, and an associate of the Minda de Gunzberg Center for
European Studies and the Davis Center for Russian and Eurasian Studies at
Harvard University.

Project Syndicate

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