What would happen if Ukraine breaks up with IMF?
IMF is now not only the guarantor of our economic well-being, but our main ally in the war against Russia
Why are you worried about the 13% inflation (like in Ukraine)? What would you say about inflation of 2600% then? What do you say about the situation when there are no goods at all, and people run back and forth to Colombia in order to buy toilet paper?And the same time, Venezuela has declared a war to the common sense. Therefore, the crisis in Ukraine is not the worst thing that could happen. This is a just a reckoning for some past mistakes. Thanks to IMF, a real catastrophe was avoided.
What will happen now if we quarrel with the IMF? We would not receive the tranche and leave the program. We will say that we are poor, but very honored (this pride is very strange: we are ready to take money, but we are not ready to do anything to get them). All economic agents will receive a clear signal: not only the Western investors, who will close their investment programs in Ukraine, but Ukrainian grandmothers as well. The end of the world will not come immediately. Still, the economy is growing, macroeconomic stability is achieved, and there will be no significant pressure at once. The inertia of the last couple of years would be preserved.
It would seem that everything is fine. But this would be an illusion. First, external debt markets will immediately be closed for us, I mean the market and institutional investors (only the Chinese ones would remain). And at first we will be just exhausted, smiling and waving the hand to the electorate from TV sets. But there will be no investment. Economic growth will end. Reserves will begin to immediately melt.
Would we survive until the presidential election?! Maybe yes, maybe no. Will there be enough resources? No. Because we will have to pay the debts. Because we will have no new money. And because without the IMF’s control, our economic policy will again unfold to the traditional Ukrainian “national producer support program.” As a result, we will suffer from the rollback of all the reforms that have already been implemented, hryvnia emission, and populism.
And this will no longer be a matter of rising incomes. It will be a question of how much poorer we will become in the next couple of years. Reserves of the National Bank without IMF funds are critically small. The budget deficit cannot be covered. You will not have to dream about entering new money.
The first thing that will react is the exchange rate. There will be a reduction in budget expenditures. Or, if it does not, then inflation itself will cut real costs. The devaluation of hryvnia will lead to a sharp increase in the cost of imported goods, including natural gas. And then we will be forced either to sharply raise the tariffs (however our populism would not let us do it, no), or increase the budget deficit. And this will lead to an even greater devaluation.
If now the dynamics of the hryvnia exchange rate is subject only to seasonal factors, and only liars and fakers frighten us that one US dollar would cost 50 hryvnia. Without the IMF program, any course becomes real.
Everything is described in the context of the scenario, when the external environment remains extremely favorable for Ukraine. There is a lot of money in the world. And steel prices are high, which ensures high returns from exports. And it seems that the things will always work this way.
For a long time, the world economy has been growing steadily, despite the fact that here in Ukraine, it is not very noticeable. The economy of the world flagship, the US, has been growing for too long, and the growth has lasted for almost 10 years. This is the second longest cycle in the modern history. The previous one lasted for 10 years and 8 months. And this is much higher than the average duration of the last 5 economic cycles, which was equal to 82 months or slightly more than 7 years. And for the last 150 years, the average term of such cycles is 6 years. What does it mean? Cyclicality must be taken into account, while economic growth is not eternal.
Wherever the bomb explodes, in the States, China or Turkey, it always hits the developing countries, which President Trump calls with a different word, damages their currencies and their commodity markets. Ukraine is lucky, but there is nobody to run away from the country (everyone has already fled), but we are extremely sensitive to raw material prices. And at that time, we always needed IMF support. Even in those times when we entered the crisis in good shape. Life without the IMF will be very painful for us, but in terms of suffering from a cyclical crisis without the IMF will be a catastrophe, from which Russia will surely benefit. After all, Putin dreams of economic collapse in Ukraine.