Ukraine Can Now Fix Its Economy, If It Moves Fast
Op-ed in the Financial Times
© Financial Times
Happily, Ukraine has achieved a democratic breakthrough. The country's economy, however, remains in crisis. There has been no growth for two years. Last year Ukraine's current account deficit was 8.9 percent of gross domestic product; its budget deficit represents 8 percent of GDP. The country is running out of currency reserves. It has not been able to borrow on international markets for a long time. Indeed, it was these economic ills that forced Viktor Yanukovich, the impeached president, to lead his country into the arms of Vladimir Putin's Russia.
Yet these problems are curable. Their main cause was a president who cared little about the health of Ukraine's economy. For the past four years Mr. Yanukovich's sole ambition has been to enrich his family and cronies. A reasonable estimate of the family's wealth is $12 billion.
In order to eliminate corruption and embezzlement Ukraine needs a radical, comprehensive, and swift economic reform program with plenty of international financing, a large proportion of which should arrive soon. Two obvious agents for these reforms are the International Monetary Fund (IMF) and the European Union.
A radical reform program should be easier to undertake in Ukraine today than in many countries that have faced similar crises in the past. The country is ready; the catastrophe Mr. Yanukovich left behind is obvious to all. In Ukraine, financial stabilization primarily means an anticorruption program, which should be carried out fast to prevent new players from exploiting old opportunities.
The Russian threat is palpable; reform is now a matter of national integrity. Ukraine has many well-trained specialists and plenty of old reform plans on the shelves of its ministries. Now they can finally be implemented. The West is fully aware of Ukraine's conundrum and ready to provide substantial financing.
The first measure should be to identify and freeze the embezzled and extorted assets of the Yanukovich family and its closest conspirators. Kiev will need energetic international assistance to find and confiscate these stolen funds. They could significantly improve Ukraine's financial situation. The country's currency reserves also need to be secured. In sudden regime changes, such funds are often stolen.
Kiev has never stuck to any IMF program for a full year. This is one reason why any new stabilization plan should not last for more than 12 months but should be all the more radical. The IMF has long made clear what needs to be done. Presumably it will send a mission next week, and it can disburse a considerable amount by late March. The total financing needed for one year is probably $15 billion; between $10 billion and $12 billion of this could come from the IMF, and the rest from the European Union.
To improve the balance of payments, Ukraine needs to devalue the hryvnia more. It has already fallen from 8 hryvnia per dollar to 9.8 hryvnia but could usefully fall a little more. Corrupt public expenditures accounting for several percent of GDP should be stopped immediately. They consist of subsidies to various companies, notably in the coal and gas industries.
For the past two decades, more or less the only way to get rich in Ukraine was to buy gas at low state-controlled prices and sell it at (much higher) market rates. This must come to an end. The new government should stop gas subsidies, which alone would cut government spending by 2 percent of GDP. Some of that should be redirected to social welfare programs for the poor.
Since 2010, government procurement has been infested with corruption. Mr. Yanukovich handed contracts to his family and cronies on ludicrously favorable terms, paying approximately twice the market price. Competitive public procurement must be introduced.
The necessary reforms go deeper, however. A corrupt state needs to be cleansed, and the European Union is the best agency to do this. The new Ukrainian government is willing to comply with its demands for democracy and the rule of law. The European Union should then sign its long-delayed association agreement. This should happen no later than March. Sixty state agencies in various EU countries have already concluded so-called twinning agreements that aim to refashion their Ukrainian counterparts in their image. This is the great anticorruption reform.
A free-trade agreement with the European Union will open a vast market to Ukrainian producers. Agriculture is already booming. The country could easily become a major recipient of foreign investment.
It is hugely ambitious. But there are encouraging precedents. Georgia is an example of a former Soviet republic that has conquered corruption. Ukraine might consider asking for help from Mikheil Saakashvili, Georgia's former president, and his team. The thaw is coming. With luck, the seeds of Ukraine's potential will finally have the chance to sprout.