ON THE face of things, the worst is over for Ukraine.
A ceasefire seems to be holding in the war that has left forces backed by
Russia in control of much of the east of the country. The IMF has found a way
to keep providing Ukraine with a financial lifeline, side-stepping a dispute
with Russia that had threatened to sever it. The economy, which has shrivelled
by about a fifth since 2013, even grew by 0.7% in the third quarter, relative
to the second (see chart).
Yet the hryvnia, Ukraine’s currency, which has lost
70% of its value over the past two years, is sliding again; government-bond
yields are rising. Politicians in Kiev are busier brawling (at times
physically) than fixing the country’s problems.
There is a risk that the hugely
unpopular government may collapse, possibly paving the way for a resurgence of
pro-Russian parties. For all the improvement in Ukraine’s circumstances, the
country’s prospects remain horribly uncertain.
The present economic uptick was inevitable after such
a big contraction. Sales of meat and poultry, which had fallen sharply as
Ukrainians economised in the depths of the crisis, have started to grow again.
Vodka consumption is on the rise too. (Champagne sales are also up, suggesting
that the government’s attempts to stamp out Ukraine’s endemic corruption are
not going perfectly.) Firms are hiring again: the unemployment rate has fallen
from 11% to 9% in recent months.
The government’s finances also look much more healthy.
That is largely thanks to Ukraine’s creditors. In August most of them agreed to
a restructuring that wiped 20% off its foreign debt. That paved the way for an
IMF rescue. It has lent $11 billion to Ukraine since the beginning of 2014, and
plans to lend another $11 billion by 2019. To that end, it changed one of its
bylaws this month, freeing it to lend to a country that has defaulted on a
sovereign lender. That manoeuvre was aimed at Russia, which lent $3 billion to
Ukraine in 2013 and rejected the August deal. Ukraine will default on the Russian loan on December 20th.
A lengthy court battle looms, but will no longer imperil the IMF’s aid.
Dramatic spending cuts have also helped right the
government’s finances. The budget is in surplus so far for 2015. Anders Aslund
of the Atlantic Council, a think-tank, says that in two years it has reduced
public spending from 53% of GDP to 46%. With private debt markets closed to it,
the government has little choice but to cut. “In the last year we have reduced
staffing of government by a fifth,” says Natalie Jaresko, the finance minister.
Spending on benefits and health care is down.
All this belt-tightening, however, further dampens
demand. As it is, consumers are struggling. According to Euromonitor, a
research firm, a quarter of outstanding consumer loans and a third of the
mortgages are in default. Real wages have fallen by 25% in the past year and
high inflation has diminished the value of savings. Even if the hryvnia
recovered a quarter of what it has lost against the dollar since 2013 — an
optimistic forecast— Ukraine would need annual growth of 5% until 2022 to reach
its pre-crisis dollar income per person.
Exports hold some promise. They powered the economy
out of the recessions of 1999 and 2009, points out Tomas Fiala of Dragon
Capital, an investment bank. At first glance the country looks set to repeat
the trick. It has an educated workforce, fertile farmland, plentiful gas
reserves and a dirt-cheap currency.
However, investment is needed to spur exports. In the
past three years capital spending has fallen by 40%. It shrank yet again in the
third quarter. A malfunctioning banking system is partly to blame. Many banks
borrowed in foreign currencies but lent in hryvnia, exposing them to the
currency’s collapse. Other banks were mere fronts for oligarchs who plundered
the deposits for themselves.
So far the National Bank of Ukraine (NBU), the central
bank, has done a good job of cleaning up the banks. In one-and-a-half years
about 60 of the 180-odd banks that existed before the crisis have been shut
down, says Mr Aslund. (Fifty more need to go, he adds.) Others are being
recapitalised, with the NBU cajoling their wealthy owners into footing the
bill. Its efforts are paying off. Deposits of foreign currency are rising.
Efforts to tackle corruption are going less well. No
prominent figures from prior regimes have been jailed, points out Timothy Ash
of Nomura, a bank, unlike in many other eastern European countries. The
government has failed to increase the derisory salaries of civil servants. Even
senior officials are paid a measly $300 a month, making corruption especially
hard to resist ($50,000 a month is said to be the going rate for a pliable
one).
No one has cleaned up the murky but lucrative system
for claiming value-added-tax rebates on exports. “Some people are still
claiming refunds for exporting air,” says Mr Fiala. The finance ministry has
put forward a sensible proposal for the budget in 2016, but it has been
hindered by those who resist the abolition of dodgy tax loopholes. The fight
has delayed $4 billion of Western help.
The foot-dragging frustrates locals as well as
foreigners. Reform-minded officials are fed up and have privately threatened to
resign. Some already have. Despite some improvement, Ukraine is still at risk
of long-lasting stagnation.
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