By Ioana Botea
The global economic crisis has unveiled how vulnerable Ukraine is - not only in its political structures, but also in its economy. In the past six months, it has seen its government collapse over the war in Georgia, its financial system disintegrated and its currency shed a third of its value, it had a bitter dispute with Russia over gas supply, and it is now struggling not to default on its sovereign debt. The global slump in commodity prices has severely affected Ukraine which is highly dependent on its steel, fertilizer and chemical exports. Industrial output crashed by 34 percent over the course of last year, and according to Valery Litvitsky, adviser to the central bank, the economy contracted by as much as 20 percent in January alone.
Overwhelmed by huge public foreign debt, heavy private borrowing in foreign currencies, large current-account deficits, lax public-spending controls and unstable leadership, Ukrainian policymakers decided to plead the International Monetary Fund (IMF) for assistance. Following Hungary, Ukraine received in early November 2008 a $16.5 billion two-year loan from the IMF, despite uncertainty regarding the country's ability to adopt the radical economic policies needed to restore confidence. The IMF package was focused on reviving the banking sector and consolidating its capacity to pay its large external debts.
The post-Soviet Ukraine has yet to achieve political stability. While some observers see the internal political struggle as part of the democratic process, others have dubbed it as immature and even farcical as orange-revolution allies, President Viktor Yushchenko and Prime Minister Yulia Tymoshenko have been sabotaging instead of supporting each other. The fact that the two political leaders are expected to compete against each other in the upcoming presidential election partly explains the dissention.
While politicians seem more preoccupied with the internal strife, concerns regarding the possibility of Ukraine to default on its sovereign debt are quickly intensifying. In an attempt to appease investor panic, Ms. Tymoshenko insisted that nothing in the government's finances warrants "pronouncing the word default." Nevertheless, dissatisfaction with Ukraine's fiscal and monetary policies has prevented the country from receiving the second tranche of the IMF loan worth $1.8 billion.
Desperate to find ways to finance the country's exorbitant deficit, Ms. Tymoshenko has been striving to consolidate political unity to confront the economic crisis. To regain IMF trust, she invited Mr. Yushchenko to cosign a declaration expressing readiness to cooperate with it. Ukraine's ability to overcome the crisis is now contingent on its leadership's wiilingness to stop the bickering and to finally combine forces.
Nice job, Ioana. Do you think that, if the IMF was restructured so that so many of the votes were not in the hands of Western powers such as the U.S. and the U.K., we would see more of a willingness to assist Ukraine? Also, do you think the IMF is fiscally capable of providing the type of assistance the country needs, or would it come up short even if it was willing to help?
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