With Ukraine facing a government and parliament crisis, the country’s key donor has warned it might withhold funds for the country “without a substantial new effort to invigorate governance reforms and fight corruption" on Kyiv’s part.
In a blunt statement issued on Feb. 10, Christine Lagarde, the managing director of the International Monetary Fund, has urged Ukraine’s leadership to “act now to put the country back on a promising path of reform.”
“I am concerned about Ukraine’s slow progress in improving governance and fighting corruption, and reducing the influence of vested interests in policymaking,” Lagarde said in the statement.
The statement comes a week after reform-minded Economy Minister Aivaras Abromavicius announced his resignation, at the same time accusing a lawmaker and close friend and business partner of President Petro Poroshenko of blocking reforms and promoting his proxies to key government positions.
The accused lawmaker – Bloc of Petro Poroshenko deputy head Ihor Kononenko – rejected the allegations and called for an investigation.
The resignation of Abromavicius spurred new calls from two minor coalition parties and the opposition for a government reshuffle, which could become possible after the cabinet delivers its annual report next week. Under the constitution, Ukrainian governments have a year’s grace period before they can be dismissed by parliament.
Meanwhile, the political instability is worsening Ukraine’s financial situation and putting additional pressure on the exchange rate of the national currency, the hryvnia. The bond markets have reacted to the political turbulence as well.
The IMF statement was prompted by the political crisis over uncertainty over the future form of the government and the decision of some ministers to resign, Deputy Finance Minister Artem Shevalev said in a comment to the Ukrainian News news agency.
“The people who signed the memorandum (with the IMF) are responsible for its implementation.” Shevalev said. “Those who put their signatures to the memorandum will still be the partners of the IMF for the next three to four months, until its next revision.”
IMF patience wearing thin
Lagarde’s statement is not a surprise, as the IMF’s patience is wearing thin, according to Douglas Rediker, a visiting fellow at Peterson Institute for International Economics in Washington, D.C., and a former member of the executive board of the International Monetary Fund representing the United States (2009-2012).
“The fund is increasingly aware of the shortfalls on corruption and other measures and the recent resignation of the minister of economy and his pointed allegations were not a surprise to the fund, but clearly pushed them further into a corner in which fund rules, in spite of remaining goodwill, are being sorely tested,” Rediker said.
He said Ukraine’s fiscal and budget reforms are moving in the right direction now, but “the anti-corruption and some other structural reforms are seen as having stalled, or worse.”
The IMF’s response, it appears, is to play hardball in order to keep pressure up on Poroshenko and Prime Minister Arseniy Yatsenyuk.
The resignation of Abromavicius is a potential turning point,” Timothy Ash, head of Europe, Middle East and Africa credit strategy at Nomura International Plc in London, said in an e-mailed note. “There is an opportunity to really force real change over ‘rule of law’ related issues, and the message is that the international community demands real and meaningful change as the price of continuing to write the checks.”
Currently, Ukraine is awaiting an IMF board decision on a third, $1.7 billion loan tranche, which in turn is linked to another $2.3 billion in financial aid from the United States, the European Unon and the World Bank. The aid is part the $17 billion extended fund facility program.
Cooperation with the IMF is crucial for Ukraine, amid Russia’s war, as the nation has no alternative sources of financing. The foreign borrowing markets are effectively closed to it, while relations with its former partner Moscow are at a historic low following Russia’s annexation of Crimea and invasion of eastern Ukraine..
“In this case, Ukraine’s choices are far more stark,” Rediker said. “Play ball, or risk being left unable to pay bills, having alienated the world’s lender of last resort. I think this is a dramatic moment for the people of Ukraine.”
Kyiv Post writer Olena Savchuk can be reached at [email protected].
