The IMF should come forward to help Ukraine

Since Ukraine liberated the Kharkiv region last weekend after the Russian occupation, Western observers have wondered how Moscow might respond. Now partly know.

“Russia responded to Ukraine’s counterattack by destroying civilian infrastructure,” Ukrainian Prime Minister Denis Shmyal told the Financial Times on Thursday, noting that Russian missiles destroyed power stations and severely damaged the giant Kryvyi Rih dam.

This creates significant humanitarian and military challenges. But it also raises a key economic question: Can Kyiv meet the immediate and escalating financial costs of destruction without slipping into a financial crisis and/or hyperinflation?

The problem for Ukraine is not only how to finance the future peacetime reconstruction costs, which are estimated at 350 billion dollars. It also faces an immediate budget crisis as it tries to keep its economy (and people) alive, and strong. Unless it receives quick help from the International Monetary Fund, among others, it risks losing this economic battle — whatever happens on the military side.

Kirillo Shevchenko, the central bank governor, vigorously explained the problem earlier this week. Since the invasion, Ukraine’s economy has shrunk by more than a third, inflation has jumped above 20 percent – and an estimated $97 billion in infrastructure has been destroyed, by just June.

This is worrying. But it could get worse soon. Schmihal says the government is currently experiencing a $5 billion gap in its monthly budget since tax revenue has collapsed, while military spending has risen.

Bankers told me that sympathetic Western creditors had “reconfigured” existing foreign debt, saving Kyiv about six billion dollars. Schmihal says the Treasury has also sold $14.5 billion in domestic war bonds and plans to sell more.

But the central bank has warned against over-issuing war bonds because it fears that this will lead to excessive inflation. It’s all right to worry: war often provokes disastrous inflationary functions.

And while Kyiv has received an estimated $17 billion in international loans and grants this year, that doesn’t fully bridge the financial gap. Shmyhal believes that Ukraine will face a monthly deficit of about $3.5 billion in 2023, assuming the war continues.

So what should the West do next to bolster Ukraine’s financial defenses? Perhaps the most important step is to urge the International Monetary Fund to provide real support.

The fund already implemented one structural adjustment program in Ukraine, in 2015. It has also provided two small amounts of $1.4 billion in emergency aid since the invasion. The second appeared this week after Kristalina Georgieva, the head of the International Monetary Fund, spoke with President Volodymyr Zelensky on the phone, as he headed to the eastern front lines.

However, Kyiv is now asking the fund to provide a full program, ideally, at least $15 billion. These numbers are not unprecedented in the history of the International Monetary Fund: Greece and Argentina received more to fight their crisis. But what would make any Ukraine deal controversial is that the IMF has never implemented a major structural adjustment program in a country mired in all-out war before.

Moreover, Ukraine’s relations with the IMF have been thorny in recent years. Fund economists are concerned about the country’s “mismanagement” (the polite term for corruption) and Zelensky’s erratic commitment to economic reform in the past.

On Ukraine’s part, there has been widespread dissatisfaction with Western financiers and the IMF’s austerity plans – and opposition to the idea of ​​foreign investors seizing Ukrainian assets. So much so that when Zelenksyy was “just” a TV actor playing the fictional president on the popular show Abdul people (Before he became the de facto president in 2019), he enthusiastically expelled the IMF from Ukraine. You cannot make up this.

But the war is now re-establishing Ukraine’s political economy, leading to unimaginable levels of unity and innovation – and undermining the power of a previously dominant oligarchy. This creates more openness to reform. Zelenki’s government is trying to show that it will be as fiscally responsible as the IMF needs.

Last week, Rustam Amirov, the official who directs the peace negotiations, was appointed as head of the supposed sovereign wealth fund. Amirov told me he has a mandate to sweat state assets, or sell them to global investors, to raise money.

So, personally, I hope the IMF will find the courage to provide meaningful support soon, not least because this could lead to more help from the US and Europe as well. The IMF reform program could attract more private sector investment if (or when) the war ends, or even sooner if Western governments start offering war insurance to private investors.

For her part, Georgieva indicated that she is preparing to be creative: After speaking to Zelensky, she told the staff that “we will somewhat adjust our ability to participate” and “there is a build-up towards an integrated program.”

This is good news but it cannot function without the support of the IMF board. So all eyes are now on what the US and European governments are doing at the International Monetary Fund’s fall meeting next month. There is a lot at stake – for both Kyiv and the West.

gillian.tett@ft.com

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