ECONOMY FOR THE WEEK
IMF Comes Out of Crisis:
Will Ukraine Follow Suit?
Over the past several months IMF has been exposed to so much criticism that there were times when analysts thought it would not survive its own internal ideological and financial crisis. The accusations and apprehensions long remained unanswered, but then there was the annual IMF-World Bank convention in early October and the receipt of $18 billion from the US last week. Now the Fund's ideological discord seems to have ended, and IMF is once again ready to serve as the main weapon to combat the global financial crisis while simultaneously solving its own financial problems.
What does all this mean for Ukraine? Until now it was generally believed that, given the world economy's globalization, it is useless, even dangerous to try to isolate oneself from other countries and violate the universal rules of the game. If this approach persists (which should not be taken for granted in view of the increasing isolationist sentiments), the authorities will have to face inevitable adjustments in Ukrainian-IMF cooperation. Otherwise, it might be necessary to go it alone.
So what new have IMF strategists thought up? The Fund's analysis of the Russian crisis leaves no doubt that its outcome will have a direct impact on the situation in Ukraine. It is a lesson that could be summed up as follows: Russia had a good economic program and strategy, but its implementation proved inadequate, because neither the program nor strategy were politically supported by the Duma or regional authorities. "The harder the reform, the more pressing the need for such support," declared IMF Executive Director Camdessus. In addition, implementing a new economic policy requires the liquidation of administrative shortcomings as a top priority. Michel Camdessus believes that, with low tax collection and poor banking supervision, uncontrollable government borrowing became a "recipe for catastrophe." In fact, Russia's biggest problem is that, despite considerable economic progress over the past few years, the government turned out too weak to carry out its policy.
The IMF mission arrived in Moscow last Thursday to answer the question of whether the Russian Cabinet is capable of proposing and carrying out a genuine program aimed at getting out of the crisis? In all likelihood, IMF's stand with regard to Russia will in many respects determine its attitude toward Ukraine where the mission was yesterday. It should also be noted that last week was not one of Ukraine's best in the context of the IMF's latest studies. The President's campaign to discredit the NBU leadership, begun in late September, received a lively response from Parliament's majority. The tune set will perhaps be regarded as the key theme by the IMF "missionaries" who will simply have no time to get down to the brass tacks of Ukraine's clan wars. Then there is the law on the monetary bread line and minimum wages. Despite the expected presidential veto, the very fact of the legislature's indifference toward the sources to finance this Hr 8 billion in additional government obligations testifies to the absence
of a political consensus. In other words, Ukraine's domestic political situation may become the obstacle in continuing cooperation with the rejuvenated IMF. The Ukrainian Cabinet has to pass muster to hope to measure up to the world's financial donor's new approaches to countries faced with financial crises. Another thing is whether trying to measure up is worth the trouble and what Ukraine should expect from IMF reform.
US Secretary of the Treasury Robert Rubin declared that IMF's new principles of assistance will enable countries with fundamental economic problems to convince international investors that they are capable of honoring their commitments in terms of liabilities before these investors lose all confidence in them. Under the new arrangement, IMF loans will not be as inexpensive as they were, nor will they be given for restructuring the borrower's debts. A similar program is being prepared by the World Bank. According to its President James Wolfensohn, the vehicle of providing credit to crisis-stricken countries will be based on a system of emergency loans to be given for a term of five years and at very high interest. Naturally, countries craving IMF support will have to meet the creditor's requirements. A package of such requirements is being worked out by international organizations. To date only general transitional approaches have been more or less clearly formulated. In the words of a ranking bureaucrat who t
ook part in their elaboration, "there is just the direction to follow, but no particulars." In a word, a sufficiently narrow target is set: building a mechanism to strengthen confidence. However, this confidence will be other than that used when issuing credits previously, and this is perhaps the main thing Ukraine can count on at present.
IMF-dictated reforms led primarily to an influx of so-called hot money, thus destabilizing developing economies, shaky as they were. Whereas domestic market instabilities in the developed countries was more or less smoothed over by administrative bodies, there are no vehicles for regulating international capital markets. Hence the economists' and politicians' attempts to develop measures capable of restricting or cushioning the painful knockdowns from the sudden outflow of such "hot money" from the developing markets. For so long as the crisis affected the developing countries only, Western governments were content to apply previously tested methods of financial aid. Credit was extended countries which had more often than experienced currency and stock market landslides. In every such case the invariable condition was raising the interest rate so the money thus received would stay in the borrower's country. The rate would be kept high until the investors' confidence had been restored and foreign investment in
flow resumed.
But then the plummeting Russian ruble hit Latin America, ricocheting to the United States, causing a sharp dollar decline and stock exchange ebb. Governments in the developed countries began to realize the need to carry out institutional reforms in the world capital movement system. The West started preparing for serious changes in the rules of the game, to prevent speculation on international markets. The reader ought to remember that only recently international financial organizations demanded from their charges the liberalization of capital movement. This proved of little avail. On the contrary, it is vitally important for countries such as Ukraine to have the right to control the placement of capital which unbinds the government's hands in carrying out its economic policy in keeping with that country's current domestic interests, without having to look over the shoulder at the foreign investor. However, this not the only innovation interesting for Ukraine.
Another project being circulated in the offices of international financial institutions aims to get private investors involved in the process of saving their own money in countries gripped by the Asian disease. An analogy is found in the bankruptcy procedure where creditors provide credit to rehabilitate the borrower in order to keep him afloat. This approach is extremely important also because it will make the investor consider the risk involved more seriously, while IMF's standard practice meant using Fund or government money to finance speculators' operations on developing markets, no matter how risky. The proposed alternative means easing the debt burden on crisis-stricken countries, since part of the expenses will be borne by the investors becoming vitally interested in restoring the borrower's financial health, the sooner the better. Such a change in attitude is critical for Ukraine. Recently this country has been on the verge of bankruptcy. Interfax Ukraine reports that as of October 22, the Cabinet wa
s still to negotiate the restructuring of its $109 million debt to Chase Manhattan Luxembourg S.A., which is already past due.
A number of analysts, however, regard this recipe as purely academic. The fact is that there is no international legal framework to compel private investors to act in keeping with US bankruptcy proceedings, and no one can actually visualize such a framework in the foreseeable future. On the other hand, the global financial crisis has reached the point where debts simply cannot be restructured without formalizing the relevant procedures. History proves that all hopes and demands for the redemption of debts in full are futile. If IMF can really help Ukrainian investors realize this, letting this opportunity pass by would be a grave error.
