The IMF approved a $17 billion 24-month stand-by lending arrangement with Ukraine at the end of April. The Fund sees the Ukrainian economy contracting 5% this year, but is enormously confident that its program will quickly set things right, projecting 2% growth next year and 4%+ growth in subsequent years.
We’ve seen this storyline before – in Greece, just a few short years ago. As the graphic above shows, the recovery projected for Ukraine is a more optimistic version of that envisioned for Greece in 2010, which turned out to be way too optimistic. The IMF saw Greece returning to growth within two years; instead, if it is lucky, Greece may just avoid yet another year of contraction in year 4. In its ex-post evaluation of the program, the IMF acknowledges that its assumptions about the Greek economy were overly sanguine; in particular, its estimated fiscal multipliers were too low and structural reform was expected to contribute too much to private growth too soon.
Ukraine’s macro-fundamentals today are generally better than Greece’s in 2010: a debt-to-GDP of 57% (vs. 133% for Greece in 2010); a budget deficit (including Naftogaz) of 8.5% (vs. 8.1% for Greece); and a current-account deficit of 4.4% (vs. 8.4% for Greece). But Ukraine is also on the verge of war, or civil war – unlike Greece in 2010.
In short, we see the IMF’s growth forecasts for Ukraine and Greece not as forecasts at all, but rather as assumptions necessary to justify the IMF’s interventions.
There are no doubt compelling geopolitical reasons for foreign financial assistance in both cases, yet we would assert that the IMF is the wrong institution to be intervening for such reasons. If and when the losses start materializing for these interventions, we suspect that the historical European claim on the Fund managing directorship will be among the first casualties.
Wall Street Journal: Ukraine Gets First Tranche of IMF Rescue Package
IMF: Ukraine Unveils Reform Program with IMF Support
Financial Times: IMF Signs Off On $17 Billion Ukraine Rescue Package
IMF: Ex Post Evaluation
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