Supporting Ukraine

New IMF loan raises questions

Last week, representatives from the International Monetary Fund (IMF) and the Ukrainian government reached what is known as a staff-level agreement about a line of financing for the literally embattled Eastern European country. This is unprecedented, given that the IMF has not ever previously made a loan to a country that is in a state of war. It is not as if this question does not frequently arise — Ethiopia, to take just one example, could have benefited from more flexibility about lending to those at war. The IMF’s commitment is of $15.6 billion; Ukraine is, as it happens, already the Fund’s third-largest borrower. That a staff-level agreement has been reached is likely a consequence of there being sufficient internal strength within the executive committee of the IMF to ensure that the loan passes muster. It is thus reasonable to ask why the taxpayer money that member countries have committed to the IMF is being sent to prop up the finances of a government that is engaged in war.

The particular irony of this situation from a South Asian perspective is that three of India’s neighbours are in the process of bargaining for IMF loans or have just closed them, and are going through painful structural adjustment. Bangladesh will have to raise its energy costs sharply in return for its recent recourse to the IMF. Meanwhile, the fiscal troubles of both Pakistan and Sri Lanka are well known. In each case, the government was made to jump through all sorts of hoops to satisfy the Fund’s staff. The political cost to the governments in power in both countries of this structural adjustment will be harsh. But the usual prescription for countries receiving IMF largesse — raise the tax base, for example — can hardly be carried out in Ukraine, given its current status. The loss of so many productive assets to Russian bombing — not to mention the occupation of highly productive cities and regions in the Donbas and Mariupol — means that the Ukrainian government probably has no idea of what its tax revenue could be even in “normal” times. It is hard to see, therefore, how the IMF could credibly claim to have performed its normal levels of due diligence about the repayment of this loan.

Larger questions about the IMF’s differential treatment of different countries will unquestionably be asked. When European countries are in crisis — whether Ukraine or Greece — new rules and precedents are set to ensure that they remain solvent. But when countries from other parts of the world require assistance, they are told to abide by the existing precedents. Thus, the IMF’s claim that it has a “new” set of rules for countries facing exceptional risk that just happen to allow it to make a loan to Ukraine does not protect it from scrutiny and criticism. Yes, there is a humanitarian reason to ensure that the Ukrainian government — which, aside from fighting a war, has to take care of huge numbers of refugees — can pay its bills. Yet such humanitarian impulses should not be allowed to rule the actions of the IMF. Direct bilateral assistance is the right format.