The International Monetary Fund threatened to cut crucial financial aid to cash-strapped Ukraine yesterday (10 February) because of the country’s “slow progress” in fighting corruption.
“Without a substantial new effort to invigorate governance reforms and fight corruption, it is hard to see how the IMF-supported program can continue and be successful,” Christine Lagarde, the IMF’s managing director, said in a strongly worded statement.
Lagarde’s comments followed the shock resignation one week ago of Ukraine’s reformist economy minister, Aivaras Abromavicius, in protest against alleged influence-peddling and state graft.
Lagarde said last week that the reasons for his resignation were troubling, but she went much further this time.
“I am concerned about Ukraine’s slow progress in improving governance and fighting corruption, and reducing the influence of vested interests in policymaking,” she said.
“It is vital that Ukraine’s leadership acts now to put the country back on a promising path of reform.”
If the IMF makes good on its threat, it would freeze all future lending under the $17.5 billion four-year aid program agreed in March 2015 on the condition that cash-strapped Ukraine delivers drastic reforms. The Fund has disbursed $6.7 billion to date.
The IMF program is the keystone of a roughly $40 billion international bailout of Ukraine, which could still collapse, with almost-certain disastrous consequences for a country reeling from a severe recession and a separatist conflict in the eastern half of the country.
The IMF is the largest provider of aid for Ukraine. But the country is also hoping for billions of dollars in additional debt relief and loans from other countries and multilateral development banks.
The World Bank, which is participating in the bailout, said it shared the IMF’s concerns about Ukraine’s slow progress in improving governance and fighting corruption. “Determined action is needed now,” a Bank spokesman said in a brief emailed statement.
The President of Ukraine, Petro Poroshenko, spoke by phone with Lagarde yesterday and emphasized that he is willing to carry out “decisive actions” to ensure the country’s political and financial stability, including a cabinet shakeup without early parliamentary elections, his office said in a statement.
“The parties agreed to elaborate a roadmap of the top-priority reforms that will give a boost to the Ukraine-IMF relations. They also agreed on the necessity of urgent adoption of all reformist laws by the Parliament,” it said.
Earlier in the day, Prime Minister Arseniy Yatsenyuk renewed his pledge to reform the former Soviet republic.
“The recent political games could cost our country dearly,” Yatsenyuk told a meeting attended by foreign security and justice officials, as well foreign ambassadors, including those from the United States and Germany.
“We will not permit a return of all the old Ukrainian rules,” said Yatsenyuk, who threatened to quit on Friday (5 February), along with his entire government.
“We will only get help when the whole world sees that we are helping ourselves and moving our country forward.”
The stakes are also high for the IMF, which has been criticized for offering aid to Ukraine in 2015 under pressure from the US, its largest stakeholder, and the European Union, despite concerns about the country’s high debt, recession and the serious geopolitical conflict with neighboring Russia.
The IMF recently modified one of its key lending rules which had threatened the continuation of its aid to Ukraine over sustainability issues, triggering an angry response from Russia which said the move “seriously undermines” its confidence in the IMF’s decisions.
The latest developments with Ukraine also bring back bad memories for the IMF.
In 2008 and in 2010, the IMF abandoned two previous lines of credit for the country — $16.4 billion and $15.1 billion, respectively — over the lack of political will in Kiev for reforms.
“Ukraine risks a return to the pattern of failed economic policies that has plagued its recent history,” Lagarde said.
The US Smbassador to Ukraine, Geoffrey Pyatt, was even firmer. In a speech at the Collegium on Ministry of Interior and Ministry of Justice Reform, he said that the US will offer support only if there would be “a new system” and if “the poisonous practices of the past, or tolerating the kind of corruption that characterized previous Ukrainian governments” are abandoned.