Economics, International economy

US support to Ukraine and IMF reform

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It is a sad commentary as to how cynical and distorted Washington politics have become when President Obama resorts to the very same tactics on US bilateral support to Ukraine as he so vehemently denounced when applied by Republican congressmen on the US debt ceiling issue. For much as those congressmen attempted to link raising the debt ceiling to public spending cuts, President Obama now wishes to make US bilateral support to Ukraine dependent on Congress approving both an increase in IMF quotas and a basic reform of IMF governance.

Leaving aside the hypocrisy of the president’s proposal, it would not seem to stand on its own merits. For there is little link between how much money the IMF can lend to Ukraine and the proposed increase in the IMF’s quota resources. With currently more than US$400 billion of uncommitted loanable resources at its disposal, the IMF can singlehandedly very comfortably meet Ukraine’s borrowing needs for the next two years. After all, the Ukrainian government itself estimates its total borrowing needs for 2014 and 2015 at only around US$35 billion. This would imply that at most the IMF would be called upon to finance Ukraine by between US$15 billion and US$20 billion. Such amounts would represent no more than 5% of the IMF’s currently available resources.

Similarly, to argue that Ukraine needs a quota increase for the IMF to loan it the amount of money it needs totally overlooks the fact that since the European sovereign debt crisis in 2010 there is no longer an effective link between how much money the IMF can lend to a country and the size of that country’s quota. In the case of the European sovereign debt crisis, IMF lending commitments to Greece and Portugal were both well in excess of 2,000% of those countries’ IMF quotas. Since Ukraine’s present IMF quota is SDR 1.370 billion, or around US$2.1 billion, at most the IMF would need to lend Ukraine is 1,000% of quota. There are many precedents for such an amount of IMF lending to an individual country.

At a more fundamental level, it is not clear why the IMF still needs to have the increase in the overall resources that the Administration keeps proposing. Since December 2010, when the G-20 agreed on the proposal to approximately double the IMF’s size, the world has changed fundamentally. In particular, countries in the European economic periphery no longer need additional massive IMF assistance, which was the very rationale for the proposed increase in the IMF’s size.

Indeed, the Europeans have now established a permanent EUR 500 billion European Stability Mechanism. More importantly yet, in September 2012, the European Central Bank introduced an Outright Monetary Transaction Program that allows it to buy unlimited quantities of a member country’s bonds with a maturity of up to 3 years. These two new European lending instruments should allow the Europeans to handle their own financial problems without the need for major additional IMF support.

In short, the question as to the appropriate size of the IMF and the reform of IMF governance are important issues that should be debated on their own merits. They should not be settled by attaching them to the much needed US bilateral support to Ukraine. This would especially seem to be the case when one considers how tenuous the link is between IMF reform and IMF lending to Ukraine.

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