IMF Deal Brings Political Challenges

BMI View : The Ukrainian government looks increasingly likely to secure IMF financing, allowing the government to avoid default over the coming months. However, the conditions attached will be politically unpopular and may prove destabilising to the fractious government. While IMF financing is positive for near-term stability, Ukraine will also have to normalise relations with Russia if it is to secure its economic future.

The IMF is reportedly preparing to put together a stand-by arrangement (SBA) of around US$18bn for Ukraine and could start making disbursements as early as April. The IMF deal, if successful, would pave the way for further aid packages from the EU. While positive for short-term economic stability, we caution that it is highly probable that the SBA would be conditional on unpopular economic reforms including a de facto devaluation of the hryvnia and a reduction in household gas subsidies. Meeting these conditions will require considerable political resolve, and will risk inflaming the tense political situation, particularly in Ukraine's eastern oblasts. All of this could potentially prove destabilising to the fractious new government.

Since the ousting of former President Viktor Yanukovych in February, Ukraine's interim government has struggled to keep the country from the brink of economic and political collapse ahead of the presidential election, currently scheduled for May 25 this year. The rapid deterioration of relations with Russia following the annexation of Crimea in March has seen the previous US$15bn financial aid package from Moscow cut off, as Russia increases the pressure on Ukraine.

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This article is tagged to:
Sector: Country Risk
Geography: Ukraine

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