Thursday, March 27, 2014

The IMF Announces Economic Aid to Ukraine

Ukraine has been at risk of defaulting on its debt.  Russia had promised to provide $15 billion in aid to the deposed government.  The IMF has promised provide $14-18 billion in aid to Ukraine and promises from western governments for aid over the next two years increase the total aid to $27 billion.

There is a difference, however, between the conditions imposed on Ukraine by the IMF and Russia.  The IMF demands structural changes in the economy in return for its help.  The basis idea is to make the economy more competitive by depreciating its currency, reducing domestic gas subsidies, and by raising taxes on the Ukraine monopolies that had been supported by its corrupt government.   On the other hand, Russia had no interest in imposing structural changes on the economy or on the corrupt government that has been deposed.  It has responded by raising the price of natural gas that it exports to Ukraine.

Ukraine's economy has deep structural problems.  The conditions imposed by the IMF, in an attempt to strengthen the economy, will not be popular.  Moreover, they may not work.  The Ukraine government may be easier to change than its economy.  The new government which will be forced to impose the structural changes has its work cut out for itself.

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