The Meaning of Ukraine’s IMF Deal

While today’s headlines focus on the truce agreement between Ukraine and Russia, a significant economic milestone was achieved yesterday with the IMF’s announcement that its staff has reached agreement with the government on a new four-year program. The Fund’s Board will likely consider the program next month. Whether or not the truce holds, the program is the core of western financial support for Ukraine. Is it enough?

The program is for $17.5 billion, representing about $6 billion in new IMF financial commitments. This is somewhat misleading, because this amount is spread over four years, as compared to the two years remaining in the existing program it replaces. It appears that the amounts the IMF will disburse this year are broadly comparable to what they were before. Similarly, the statement that total support for Ukraine will total $40 billion would seem to represent mostly a repackaging of previously announced commitments (including $2 billion in U.S. loan guarantees and a roughly similar amount from the EU). If you believe that the program will need to be revised several times even in the best of scenarios, and could need a major rewrite later this year if events on the ground continue on their current path, then the truly additional resources, or “real water” of the announcement, is minimal.

Most of the additional financing for the program comes from restructuring of private debt, which will take time to arrange but will be a condition for future drawings in the program (a similar approach was used in Uruguay in 2003). Pushing back maturities at roughly current interest rates (a “reprofiling” in Fund-speak) would provide substantial relief and keep creditors engaged in Ukraine until a time when sustainability is clearer, and seems to be what the markets are anticipating. Further, given the extraordinary uncertainty associated with the conflict, and the difficulty the IMF has in taking such factors into account in their debt sustainability assessments, it is folly to think we know now what the needed relief will be. But a deeper restructuring now that also includes some reduction of principal amount can’t be ruled out. After all, debt is much higher than previously admitted and in almost any reasonable scenario it is highly likely that the official sector will decide that a deep restructuring is needed eventually, so why not do it now?  On balance, and with the focus on assuring adequate financing through a quick deal with broad participation, reprofiling looks to be the sensible choice. But either way, the decision on private sector involvement (PSI) in this deal may well be precedential for the larger, ongoing debate over the architecture of international debt policy.

The financing program would seem to assume that the $3 billion Russian bond that comes due in December would be restructured or otherwise pushed back, but presumably the documents will need to be silent on this issue, as Russian consent cannot be assumed at this point. With reserves down to $5.4 billion (from $16.3 billion in May), and external financing needs of $45-50 billion over the next three years, there is little scope for debt payment in the near term.

Is the program “enough?” It is hard to see this program as creating the conditions for Ukraine to grow absent an end to the hostilities. Much higher levels of official bilateral aid will likely be required in the future if the West is truly committed to rebuilding Ukraine. Still, there are important positives from the agreement, both in terms of the government’s commitment to continue its reform effort and the West’s commitment to stick with Ukraine in the face of continued Russian aggression. The upfront measures in the program—including further sizable energy tariff increases, bank restructuring, governance reforms of state-owned enterprises, and legal changes to implement the anti-corruption and judicial reform agenda—are all desperately needed over the longer run even as the pace of reform needs to be slowed reflecting the current crisis. The degree of fiscal consolidation also seems realistic. One big question relates to the hole in the banking system, which appears much larger than originally estimated; the recent sharp decline in the exchange rate no doubt made that hole even larger.

Overall, while I remain highly critical of the West’s stinginess in providing bilateral economic assistance as part of its overall strategy of support for Ukraine, the Fund has done what it could do, and it is an important bit of breathing space for the Ukrainian government.