There are topics in Ukrainian policy and economics which are not acceptable to be discussed and especially analyzed during certain time periods lest one harm the state’s relations of the state with international structures. Cooperation with the International Monetary Fund is precisely such a topic. But, it seems that the suspension of the extended financing facility (EFF) program by the IMF the last September and delay in deciding whether to resume it have given an impetus to remove all kinds of taboos on criticizing relations with the IMF, which have cooled considerably and are in danger of being broken off altogether. It is in this light that Leonid Kuchma’s recent public statements on current cooperation with the IMF should be viewed.
It is not known whether a preliminary profound analysis of the possible negative consequences of cooperation with the IMF was done in the past and, if so, why have we agreed with the terms laid down by the fund? But, as often happens the overwhelming joy about the confidence that “foreign countries will help us” has been supplanted by sober evaluations of the results. And it has turned out here that not all is well on the home front. Why has it happened this way? To what extent has the cooperation with the IMF benefited Ukraine? And to what extent is the resumption of loans realistic, and what could result from their final cessation?
Defenders’ of cooperation with the IMF main argument was that the IMF loans are granted on the lowest interest conditions offered on the international financial market. The second argument was that these loans were critically needed medicine for our sick economy, without which it could not be certain of recovery. Using medical terminology, it should be noted that taking any medicine can do any good only if three conditions are met: the dose is adequate, it works only on strictly defined sick parts of the body, and there are no side effects which could bring the whole course of treatment to naught. While analyzing the six years of our cooperation with the IMF we are coming to the conclusion that not all these conditions were met. The total amount of the loans granted to Ukraine within the framework of both IMF programs was approximately $3.5 billion or $70 per capita. This amount is too small for a country with a population of 50 million to influence the economy significantly. By way of comparison, Mexico has received $52 billion from the IMF.
Another problem was effective use of the granted loans. Here an immediate obstacle arose in terms of the strict limitations on how the funds could be used. They could not be invested in modernizing and expanding production, developing new technologies and samples of high-tech products, etc. They were intended only to support the balance of payments, that is, for foreign purchases. Thus, the loan funds were not used within the country in fact but went back abroad whence they had come, supporting the economies of the developed countries. By increasing the state’s foreign debt such terms were causing the problem of the repayment of that debt with interest.
Simultaneously, these “cheap” loans were destroying the economy of Ukraine because of their terms. Allow me a figurative comparison. You need money badly and go to your good neighbor to borrow it. He agrees to lend you the needed amount for a certain period of time even without interest but on the following terms. First, you should have only one job and not to earn any extra money anywhere; second, your wife should stop selling in the market where your neighbor’s sister does; third, you should stop paying for your daughter’s university education and not to give any allowance: she should stop studying and go to work; and so on. I think that most of us would think twice whether such terms are acceptable because your family’s financial losses from them would exceed the amount borrowed. Ukraine has accepted the IMF terms, and now it is difficult to say why it did. It is quite possible that, as has happened many times, that they just did not calculate all the consequences. Or, perhaps, the aim was to get loans at all costs, and for that reason they simply did not want to notice the negative effects of their terms. It already reminds me of a drug addict’s psychology: the only thing that matters is to get the next financial injection and forget about everything else.
Meanwhile, leading domestic economists sounded the alarm already after the first year of the cooperation with the IMF. As far back as 1996 Mykola Azarov, who then chaired the Verkhovna Rada Budget Commission, said, “The fulfillment of the IMF recommendations only for the first quarter has resulted in decrease of approximately $500 million in budget revenues, while the amount of the promised ‘aid’ (if, of course, a loan should be considered aid) was $400 million. Whether such an ‘exchange’ was worthwhile raises serious doubts.” (Biznes, No. 16, April 30, 1996). Later the IMF terms began to get more and more strict, infringing on the national interests of our country while their acceptance was testimony in our own lack of patriotism. Examples are our refraining from establishing free economic zones, abolishing the duty on sunflower seed exports, termination of grain market regulation, and superfluous liberalization of foreign trade. Finally the IMF suspended subsequent tranches within the program framework because of at several unfulfilled points of the Memorandum on Cooperation.
If we give an unbiased evaluation of all the previous years of our cooperation with the IMF we are forced to admit that no positive changes have come about. And the problem is not just the lack of will to conduct worthwhile market reforms. In my opinion, it is the terms proposed by the IMF that constituted one of the principal obstacles to such reforms since the process of reforms which the Ukrainian economy required would certainly be incompatible with the economic postulates laid down in the IMF recommendations. Let us mention only two, which are the most important.
The monetary economic model imposed on Ukraine could not be implemented under the conditions of a transition economy. There is no example where the use of this model under the conditions like ours has had a positive effect. Moreover, as Academician Yuri Pakhomov has noted, the additional terms dictated by the IMF are destructive for more or less developed countries, especially for their scientific and technical potential. And the IMF does make no distinction between the postcommunist states and those of Latin America, although the recipes proposed by the fund are far from universally valid.
Today nearly a year has passed since Ukraine was forced to survive without external financing and rely only on its own financial resources. The fact that even after the termination of funding we continue to follow a great number of provisions of the signed Memorandum on Cooperation can be explained only by the still glimmering hope of its resumption. Time will tell how justified such expectations are, but now it is already clear that the terms of cooperation should be changed by our fighting for our own interests more persistently, and the President of Ukraine has spoken about this. The question is will the IMF agree to such changes? I doubt that at present the IMF is so much interested in cooperation with Ukraine, especially in light of its own internal problems and pending revision of the strategy of further cooperation with developing countries. Moreover, during six previous years “the Moor has done his duty” sufficiently by throwing the Ukrainian economy back ten years.
But should the IMF refuse to cooperate on terms acceptable to Ukraine and the loans finally stop, we should consider it no great tragedy. International experience offers quite enough examples of where transition economy states that halted cooperation with this financial organization (and sometimes even not commencing it) reformed their economies successfully. The Baltic states, Slovenia, Croatia, and Slovakia prove it. It looks like the country’s top leaders have already begun analyzing this option also. Mr. Kuchma’s statement that if Ukraine were able to repay the loans to the IMF in the immediate future (should be read, before they are due) he would gladly do it and stop cooperating with the fund testifies to this. An example of the kind exists already. Romania did precisely this in the eighties. True, it cost the country tremendous efforts and a declining standard of living. Romania, however, did not have such a reserve as Ukraine does. Strange as it may seem, the IMF puts forth such conditions that refusing them can be better for the country’s economy than the loans are.
We can develop and implement a number of measures which would mitigate the consequences of the lack of such loans in the first stage, in particular, to refrain from non-critical imports and introduce currency limitations similar to those which were effective in Western European countries after the war, to revise foreign trade policies by introducing protectionist measures to protect the domestic market, etc. There are always reserves; we just have to discover them. The CNSD could put in its word as well by dedicating one of its sessions to the problem. Finally, the last year that we lived through without foreign loans has enriched us with basic experience and proven that we are able to exist without them. Thus, whether we will kick the financial needle or not depends not so much upon the IMF as on us.
