Please answer the following case study questions (at leaest a paragraph for each
ID: 1119544 • Letter: P
Question
Please answer the following case study questions (at leaest a paragraph for each):
1. Why do you think Victor Yanukovych walked away from a trade agreement with the EU in favor of closer ties with Russia? What did he gain by doing this? What did he lose?
2. What were the root causes of Ukraine’s currency crisis? Without help from the IMF, what might have happened?
3. Were the policy recommendations made by the IMF reasonable?
4. Why do you think Ukrainian government balked at fully implementing the IMF policies?
5. Was the IMF right to suspend disbursement of monies under its loan program in October 2015? Under what conditions should the IMF resume making loans?
6. What might happen if the IMF discontinues its loan program to Ukraine, as it has threatened to do?
7. Could the IMF have done anything differently to avoid the situation it now finds itself in?
Back in late 2013, the then-president of Ukraine, Viktor Yanukovych, suspended preparations for the implementation of a trade agreement with the European Union, opting instead for closer ties with Russia. Yanukovych's decision resulted in mass protests in the capital city Kiev and elsewhere in western Ukraine, where closer ties with the West were seen as a necessary counterbalance to the growing influence of its powerful neighbor to the east, the increasingly autocratic Russia of VMadimir Putin. These protests ultimately led to Yanukovych's ouster from office in February 2014. Following his removal, unrest enveloped the largely Russian-speaking provinces of eastern and southern Ukraine from which he had drawn his support. In March 2014 the autonomous region of Crimea was annexed by Russia, while a civil war between the new Ukrainian government and pro-Russian separatists developed in eastern Ukraine. The result was an economic disaster for Ukraine. In 2014, the country's GDP shrank by nearly 10 percent. The currency, the hryvina, fell by more than 50 percent against other currencies a capital fled the country. As the costs of imports rose, inflation jumped from 1 to 25 percent. In a desperate attempt to support the value of its currency, Ukraine's central bank bought hryvina on the foreign exchange market, selling its foreign currency reserves to do so. Ukraine's foreign exchange reserves declined from more than S16 billion in mid-2014 to under S6 billion by early 2015. Moreover, the country was facing debt repayments of at least S10 billion and gas import bills from Russia, while its own banking system was shattered. In an attempt to pull Ukraine out of an economic tailspin, in April 2014, the International Monetary Fund (IMF) pledged to contribute S17 billion in loans to the country over two years, of which about S5 billion was disbursed in 2014. It wasn't enough. The currency continued to lose value, inflation increased, unemployment rose, and the economy shrank. In early March 2015, the IMF deepened its involvement in the country, putting together a package of additional financial support. The IMF agreed to a four-year deal to loan $17.5 billion to Ukraine. The deal was expected to unlock another $20 billion in loans from the United States and the European Union. In return for these funds, which were to be used to support the value of the hryvina in foreign exchange markets, Ukraine had to agree to a raft of policies imposed at the bequest of the IMF. The country agreed to maintain a free floating exchange rate and to pursue a tight monetary policy aimed at restoring price stability. The state-owned natural gas company, Naftogaz, was also required to increase its prices by as much as 200 percent. Naftogaz had been buying natural gas at market prices from Russia and selling it at deeply subsidized prices to Ukrainians. This money-losing transaction had been financed by issuing debt, which the government could no longer service. Indeed, a growing debt burden and excessive government spending were major problems facing the country. These problems only got worse as the economy contracted and the tax base contracted. At the insistence of the IMF, the Ukrainian government also agreed to cut spending on unemployment and disability insurance, to reduce the salaries of state workers, and to cut state pensions The IMF believed that while these austerity policies would result in the economy shrinking by a further 5 percent in 2015, the economy would start growing again in 2016. Unfortunately conditions in Ukraine deteriorated further in 2015. After some initial success, the Ukrainian government pulled back from implementing the full raft of austerity policies proposed by the To make matters worse, there was evidence that some of the IMF loans were being syphoned off or squandered by corrupt government officials. In October 2015, the IMF responded by halting its dispersal of funds under the loan progrzm and pressuring Ukraine to institute economic reforms and tackle government corruption. With funds from the IMF on hold, the Ukrainian economy continued to decline, shrinking by an estimated 11 percent in 2015. Unemployment continued to rise, and the inflation rate jumped to around 50 percent.Explanation / Answer
Answering the first four questions.
1) Yanukovich walked away from trade agreement with EU under foreign influence from Russian government. Probably he tried to position himself as an ally of Russia, and attract more attention rather than becoming another run-of the mill head of state in the US-EU camp.
2) Declining exports, a heavy import bill, cost of war, political instability, were the reasons for Ukraine's currency crisis.
3) No. IMF policy recommendation of 200% jump in gas prices created a major supply shock for the econom even as it was reeling under a demand shock. The result is now stagflation at much lower levels of output and employment.
4) Ukranian government probably could not justify to its people the harsh IMF measures, especially after the initial phase ended up only further deteriorating the situation.