A new deal with the International Monetary Fund is in the books for Ukraine, a deal designed to provide rapid macroeconomic stabilization for a country fraught with war. In three weeks, Ukraine expects a first installment of $8 billion as part of a $40 billion bailout scheduled for the next few years. The first item on the stabilization list is the currency market, where the IMF package should calm traders and slow down the plummeting Ukrainian hryvnia (UAH)—exchanging now at 33 units per dollar, compared to 16 in early February. Ukraine’s central bank chief, Valeria Gontareva, declared that “these irrational movements [of currency] are linked solely to irrational market behavior which is driven more by fear than by an understanding of what is going on in the market”. The emergency currency trading ban now in place in Ukraine will only suspend the market for a few days: as soon as it is lifted, the hryvnia is likely to drop even more rapidly.
The markets, however, are hardly irrational. Over the last 20 years, the National Bank of Ukraine has increased M2 from 1 billion UAH to 906 billion, and price inflation is now in the double digits. And since the 2008 crisis, the country’s situation has only gone from bad to worse. Petty trade wars with Russia—cutting gas supplies or banning chocolate (!) exports from Ukraine—soon turned into a real war, and have brought the economy to the brink of collapse.
The fact that the IMF is now resuming its loans to Ukraine— first offered in 2008 to help steel exports—will do more harm than good. From the Colonial Development Act in 1929, when the UK first offered loans to its colonies, to the United States’ financial endeavors in countries it has helped ‘reconstruct,’ up to the institutionalized IMF and WB loans, foreign aid is one of the least successful government programs, which is saying a lot. In the short run, Ukraine’s problem is the hike in sovereign debt. IMF’s loan was estimated to raise Ukraine’s foreign obligations to 70% of GDP, an allegedly reasonable threshold by IMF standards. However, the currency has more than halved its value since these calculations, which means that new estimates put the debt-to-GDP burden around 140%. Moreover, the GDP growth rate is falling, Ukraine’s foreign currency reserves are already depleted, and things seem to be heading toward yet another monetary disaster.
In the longer run, foreign aid and sovereign bailouts only finance reckless government spending, and mask the effects of disastrous economic policies, helping to keep these policies and their architects in place. No wonder Ukrainian officials are optimistic that “as soon as [Ukraine] starts getting real help from our international sponsors, we are looking into the future with perfect calm.” Their calm, as Mises explained, is due to the fact that foreign aid “is subsidizing all over the world the worst failure of history: socialism. But for these lavish subsidies the continuation of the socialist schemes would have become long since unfeasible.”
In Ukraine’s case, the funds are also there to finance the ongoing war. In an alternative balance of power scenario, its international sponsor would not be the IMF, but the newly founded BRICS multilateral bank, recently supplied with more funds by Russia.
The only silver lining is that some Ukrainians can still laugh about this. A construction worker, carrying the grocery bag full of hryvnias he received in exchange for his dollars, quipped that "soon we will have to walk around with suitcases for cash, like in the 1990s."
After all, the Cold monetary War isn’t over yet.
