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‘Ukrainian economy is caving in on itself’

Published time: May 02, 2014 10:51
The International Monetary Fund (IMF) headquarters  in Washington, DC (AFP Photo)

The IMF loan to Ukraine is just a sort of band aid to hold it together, while harsh austerity measures will only worsen the situation for the poor Ukrainian people rather than bail out them, editor of Business New Europe Ben Aris, told RT.

This March the IMF announced that it would give Ukraine up to $18 billion in order to help the country avoid the default. However, the IMF also demands huge economic reforms in return.

RT: Ukraine is certainly in need of money. So what's wrong with getting help from the IMF then?

Ben Aris: It’s in desperate need of money. The country is virtually bankrupt, it is living from hand to mouth, running on fumes, and the IMF has stepped in with a program that should be over two years, so they are looking for some $17 billion this year. However, it comes with strings attached and there lies a problem. The balls are now very firmly into the government’s court and they need to come up with a reform program because when all is said and done they can’t buy their way out of crisis, they need to fix the economy and that money is just a sort of plaster to hold it together while they are getting on with that work. That is going to be extremely difficult, it’s hard to express just how sick the Ukrainian economy is; it is one of only two countries in the whole fifteen republics of the former Soviet Union that has yet to reach its 1991 level. So they have everything to do before them and of course doing that in a very tense and unstable political situation.

RT: The IMF claims the economic reforms will take care of the most vulnerable there, but what actually can they do for people in reality?

BA: It’s about putting the economy back on to a stable footing and that means getting control of deficits - the current account deficit is very high, the budget deficit is very high, the economy itself is in a free fall, the government is saying it is going to contract by 3 percent, the program announced today actually assumes 5 percent and the analysts are saying that the contraction could be as severe as 10 percent. This is an economy caving in on itself. And in order to do that they are going to have to introduce some very harsh austerity. By that I mean they are going to cut the public sector, they are going to cut wages, they are going to cut what they call an overly generous pension, and at the same time they are going to have to raise taxes. So the poor Ukrainian people, rather than being bailed out by the IMF, are going to be face the sort of austerity that the populations of Greece and Cyprus have seen, if not even more harsh, even more difficult to pay, and that of course will cause problems. The promises that have been made by the EU association and IMF bailout have led people to believe that once the rest comes to help, then everything is going to get better, and actually in the short term it’s going to get a lot worse for the average person.

RT: Meanwhile, Transparency International ranks Ukraine as a highly corrupt country. Is the IMF worried about what might happen to their cash do you think?

BA: This is actually one of the core problems. The corruption is a function of the fact that in the last 10 years no government, neither Blue, nor Orange, has actually attempted to even begin the process of building up new institutions of the functioning government. So the first thing the government is going to have to do is try to put all of these pieces together to build the machinery of normal government, and that is going to be very difficult. Part and parcel of that is stamping out corruption. Transparency called it the most corrupt country in eastern Europe and it has similar problems with press freedom, human rights… it has the whole gamut of issues to deal with. Just now we are turning to the work of rebuilding the country, whereas most of the countries of the region have been at it for the 10 years.

RT: Where does this leave Moscow? Will it help in the future if things go really bad?

BA: One of the ironies is that the first tranche is going to be delivered immediately… $3 billion… a large part of that is going to end up in Russia’s coffers to pay for gas and bond payments. At the end of the day, some of the people in Ukraine have intimated that to rescue Ukraine is impossible without cooperation and partnership with Russia. Russia remains a key trading partner, it also heavily invested into the economy, it banks there and main crediting organizations are actually still functioning and for Ukraine to prosper and become healthy again, it’s inconceivable that they can do it without Russia. At the same time we have the European association agreement, but EU membership is not on the table, and EU membership would come with all the structural reforms that it desperately needs. The Ukrainian economy is actually dragging the Russian economy down and so it’s in Russian interests to see something done. But obviously where we stand for the moment, we have a long way from having a three-way conversation between the EU, Kiev and Moscow.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.