February 14, 2011

Ukraine's Macroeconomic Situation

Here is a snapshot of data taken from the EBRD's Macroeconomic Indicators. The 2007-2009 recession had a devastating effect on Ukraine's economy. GDP dropped by 15.1%, unemployment reached 8.1%, consumer prices increased by 15.9 % and producer prices increased by 6.5%. Ukraine's external debt grew from 56.4% to 91.7% of its GDP. Ukraine's internal government debt increased from 19% to 31.3% of its GDP. 
I am always amazed how politics distorts a macroeconomic reality. If I cranked up my credit cards to 150% of my annual income, who would give me a loan? I cannot think of anyone except the Lehman Brothers. Oops, they are out of the business. 
Why should it be different with countries? The Ukrainian government is negotiating another loan with the IMF. By the way, the government has already received a $15.1 billion loan in August 2010. The IMF's website says that "the IMF’s Executive Board has approved a $15.1 billion loan for Ukraine to put the country on the path to fiscal sustainability, reform the gas sector, and shore up the country’s banking system." What fiscal sustainability do we talk about here? Did someone look at the currently outstanding size of both internal and external debts of Ukraine? It is not fiscally sustainable now. 
Where do all IMF loans go? Ukraine looks like a black hole that sucks in multi-billion-dollar loans from international charitable organizations like IMF or EBRD. Ukraine and similar countries cannot have the fiscal sustainability until they develop a government accountability. Until then each charitable organization must correct their language by calling their "loan for Ukraine" as "loan for the government". 

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