Ukraine will follow trend of past IMF bailouts

If any organization has taken the proverb “If at first you don’t succeed, try, try again” to heart, it is the International Monetary Fund.  

Since its inception in 1945, the IMF has received heavy criticism from the international community for its policy decisions, namely for forcing distressed countries to enact austerity measures and liberalize their capital markets in return for a badly needed loan known as “conditionality.”

Yet, it has not hesitated to continue doing so. During the wave of Eurozone debt trouble, the organization acted as part of the “troika” — the European Central Bank, the European Commission and the IMF — ensuring the solvency of floundering European Union governments that were forced to enact recessionary policies in order to improve their budgetary position.

Most recently, the IMF has agreed to bail out Ukraine, which is in the midst of political turmoil, to the tune of $14 billion to $18 billion. And, as per usual, in return for a loan to prevent the Ukrainian government from default, the country must enact a set of austerity measures.

Unfortunately, this exchange will prove devastating for Ukraine as well as the IMF.

There are several different policies Ukraine must implement in return for this loan. However, one requirement is particularly damaging and chronologically pertinent — the retraction of government subsidies for domestic gas used for heating.

On May 1, the Ukrainian state energy company Naftogaz announced that it would raise the price of domestic gas by more than 50 percent, a move largely seen as a dedication by the state to enact the IMF’s intended policies in the future. One of the conditions of Ukraine receiving a loan was curtailing subsidies, so by taking action, the government shows its commitment to IMF-sponsored reform, which increases its chances of receiving funding. 

Now it is evident that for Ukraine to achieve long-term fiscal balance, eliminating or largely reducing this subsidy is necessary, as it amounts to 8 percent of the country’s GDP. This is why it is a condition of the IMF loan — as a lender, the organization wants to ensure that it will be paid back.

That being said, in the short term this policy will lead to political instability, reducing business confidence and subsequently economic activity. This combination of civil unrest and dwindling tax revenues as GDP falls will ultimately result in a worsening of the situation in Ukraine. In a painfully ironic finish, the IMF will not be paid back because of the effects of its policy to ensure that its loan will be honored.

But don’t take my word for it — this narrative has been played out again and again across countries in which the IMF has intervened.

In 1998, the IMF provided a loan of $138 million to Bolivia in exchange for a wave of privatization in the country, including the sale of the state water agency in the city of Cochabamba. As water prices rose, the city was forced to shut down for four days as protesters flooded the streets.

A year earlier, the IMF lent Indonesia a lofty $40 billion in exchange for the closure of several insolvent banks in the aftermath of the East Asian financial crisis. Then, in 1998, in return for an installment of this payment, the country removed subsidies on food and fuel for its citizens, sparking riots and resulting in the resignation of President Haji Muhammad Suharto. Later that year, the IMF ended up allowing these subsidies to be reinstated.

Clearly, fomenting civil unrest by removing food, fuel or water subsidies is bad social policy. It destroys business confidence and shoves international investment out of the country, as business activity is hampered by riots and, in the case of Bolivia, it can even result in the closure of the entire city.

Unfortunately, this is also what will result from the removal of heating gas subsidies in Ukraine. In the words of Greg Palast in The Guardian, writing on the IMF’s actions in the late 1990s, “The IMF riot is painfully predictable.”

The country might be saved from further unrest for the time being, as the demand for heating gas is heavily reduced during the spring and summer. However, come winter, Ukrainian citizens who cannot afford to heat their homes will certainly not be pleased with whichever politician wins the upcoming election.

Additionally, consumers will not only be faced with higher gas prices, but also decreased purchasing power. Inflation is expected to increase by 12 to 14 percent in response to the Ukrainian hryvnia — the country’s currency — now trading freely on international markets and a rise in gas prices for heating companies, two policies also pushed by the IMF.

As if this all weren’t enough, the dissolution of heating gas subsidies poses another threat — it makes Ukraine vulnerable to further gas price manipulation by Russia, which hasn’t hesitated to use its market power to wreak havoc in the country before. Thus, this policy might not only lead to civil unrest and economic weakness, but also thwart the international political goals of most of the countries that fund the IMF by increasing Russia’s influence over Ukraine.

Perhaps the IMF should take a lesson from comedian W.C. Fields, who advised, “If at first you don’t succeed, try, try again. Then quit. No use being a damn fool about it.”

Write to Thomas at teh18@pitt.edu.