Why IMF supports Ukraine with $17bn ..?

The International Monetary Fund’s board signed off on a $17bn two-year aid programmeme for Ukraine on Wednesday to help the former Soviet republic’s economy recover after months of upheaval as it continues to face geopolitical uncertainty. 
The IMF aid will allow the immediate disbursement of $3.2bn to Kiev and unlock further credits from other donors of about $15bn, intended to help Ukraine stabilize its economy in the middle of its worst civil turmoil since independence in 1991. 
IMF managing director Christine Lagarde admitted the programme faced risks, including from the government’s ability to carry out the politically unpopular measures necessary to get its finances in order. 
“In particular, further escalation of tensions with Russia and unrest in the east of the country pose a substantial risk to the economic outlook,” she said in a statement. 
Pro-Moscow separatists seized government offices in more Ukrainian towns on Wednesday, a further sign authorities in Kiev are losing control of the country’s eastern industrial heartland bordering Russia. 
The unrest in the east follows months of anti-government protests and Russia’s annexation of the Crimea region, which had already pushed Ukraine’s economy to the brink of bankruptcy and a likely economic contraction this year. 
Kiev is also in a dispute with Moscow over the price it will pay for natural gas exports in the future, and over about $2.2bn Russia says it is owed for prior gas purchases. 
Ukraine’s economy may further suffer if sanctions intensify on Russia, a key export market. Western nations have placed visa bans and asset freezes on Russian individuals and companies over what they see as meddling in Ukraine. 
“Anything that undermines the economic situation of (Ukraine) will jeopardize the implementation of the programme, which is why we very strongly encourage the parties to negotiate, to come to terms,” Lagarde told reporters after the board’s decision. 
The IMF on Wednesday slashed its already modest growth forecast for Russia, warning that sanctions were scaring off investors and pushing the economy towards recession. 
The IMF said it also expects Ukraine’s economy to contract by about 5% this year; government forecasts are for a 3% contraction. The economy should rebound to 2% next year, and 4 to 4.5% after that, according to the fund. 
External debt should rise to just below 100% of GDP this year as the government borrows money to finance itself and devalues its currency, even as revenues fall because of the economic contraction and political unrest. 
The decision from the IMF’s 24-member board, which includes representatives from Russia and the US, allows Ukraine to meet looming obligations and avoid a potential debt default. Of the first tranche, $2bn is intended to support the budget. 
But political instability makes it even more difficult for Ukraine to get its economy back into shape, even though the new government has pledged to pursue reforms as a condition for receiving IMF aid. 
The IMF’s board decided to meet every two months for the next couple reviews of Ukraine’s programme, rather than follow the typical three-month schedule, in order to closely track the government’s commitment to reforms such as floating the currency and cutting fiscal deficits. 
Ukraine’s previous two IMF programmes were suspended after the government failed to do what it had promised. 
The IMF expects Ukraine to implement major reforms in its energy and financial sectors, including raising the price of gas for domestic consumers. 
The ultimate goal is to fully eliminate the deficit of Naftogaz, the state oil and gas company, by 2018. 
Naftogaz imports a vast amount of gas and oil from Russia for distribution to home consumers, selling it for lower prices than what it paid and constantly running a deficit. 
The Ukrainian government, in power until elections on May 25, has already said it would raise gas prices by more than 50% from yesterday. 
“(Ukraine) has demonstrated in the last few weeks that it can undertake comprehensive reforms and has actually addressed some of the issues that have been outstanding for a long time,” Lagarde said. “We believe that Ukraine has an opportunity to seize the moment, to break away from previous practices, both from the fiscal, from the monetary, and from the governance point of view.”

By Mick Krever, CNN

There have “clearly” been consequences for the Russian economy because of the crisis in Ukraine, Christine Lagarde, managing director of the International Monetary Fund, told CNN’s Christiane Amanpour on Thursday.

The IMF said Wednesday that the Russian economy was in recession, and is expected to grow by only 0.2% in 2014.

“If you look at the monetary policy, if you look at the capital flows, if you look at their own forecast, there have been consequences on the Russian economy as a result of the geopolitical situation, the uncertainty, and the sanctions that have been decided,” Lagarde told Amanpour.

In a key sign of international support for Ukraine, the International Monetary Fund approved a $17.1 billion bailout for the country on Thursday.

The bailout, Lagarde, said, is “obviously not without risk, but it’s a necessity to respond to a member’s request.”

Part 1: Christine Lagarde talks Ukraine, Russia

Lagarde applauded the interim Ukrainian government’s efforts, including agreeing to allow its exchange rate to fluctuate and reforming the way the government draws up contracts.

And the $17 billion, she said, will be disbursed over the course of two years – not in one lump sum.

“It will not be enough, let’s face it. But as usual, the IMF has to intervene in times of crisis. And when we do so, we take all the precautions we can and then we try to catalyze additional support.”

Amanpour asked whether Lagarde believes the economic consequences will have any impact on Russian President Vladimir Putin’s calculations about future plans.

“It’s not the business of the IMF to get involved in that side of the equation,” she said. “We look at the economic terms; we look at the economic consequences; we offer policy advice.”

The European Union passed a new round of sanctions on Russia Tuesday, targeting 15 individuals but stopping short of industry-wide measures.

It is clear, Lagarde said, that European countries are to varying degrees dependent on Russia, and that “any hardening of the sanctions” would have an effect on their economies.

“Our hope, given the fragile recovery that we are seeing around the world, particularly out of the eurozone, is that these matters can be resolved otherwise than through escalated sanctions that clearly will hurt the economy.”

Amanpour challenged Lagarde on whether the international community has a duty to uphold the rules of “sovereignty and territorial integrity,” no matter the economic consequences.

“That is for sovereign states to decide,” Lagarde insisted.

Part 2: Lagarde: China won’t have hard landing

China: Soon world’s largest economy?

It has long been clear that China will one day overtake the United States as the world’s largest economy, but new figures released by the World Bank indicate that that could happen as soon as this year.

(The International Monetary Fund, which unlike the World Bank does not take into account the variation in the purchasing power of a single unit of currency between countries, gives that occurrence a longer time frame. In other words, the difference is just a matter of which indicator they are looking at.)

“We still see China at 7.5 and continuing to grow, probably at the slightly reduced pace over time in the next five years or so because the country’s developing so much,” Lagarde said.

The fact that Chinese growth will slow, she said, “is not a bad idea, actually, because the focus from the Chinese authorities would be to produce more quality growth than quantity growth.”

“We are not of those that believe that China will have a hard landing,” on the idea that growth will suddenly collapse.

The IMF has a “really solid partnership and dialogue” with the Chinese government, she said, and praised their efforts to focus on domestic consumption, rather than investment and exports, as the engine of the future Chinese economy.

Part 3: IMF chief warns of inequality’s danger

Inequality: The economic issue du jour

It is not every day that a 600-page economic book, dense with statistics, becomes a best seller.

But French economist Thomas Piketty’s tome on inequality, “Capital in the Twenty-First Century,” has done just that.

It has pushed the economic, and political, worlds to pay attention to the issue.

Piketty writes that inequality could “radically undermine the meritocratic values of which democratic societies are based.”

Lagarde said that was a bit of a “political economic” statement.

“Our job is to look at the economic consequences of rising inequality. And we believe that it could have macroeconomic consequences that would undermine the sustainability of growth and the stability of the social fabric of society.”

It is a surprising statement for an IMF director, representing an organization that has long advocated that emerging economies stick to traditional programs of market liberalization.

“I’m of those who believe that excesses in all matters are not a good idea, whether it’s formation of bubbles, whether it’s excess in the financial market, whether it’s excess of inequality, it has to be watched, it has to be measured and it has to be anticipated in terms of consequences.”

Contrary to traditional orthodoxy, she said, well-calibrated economic redistribution is not bad for growth.

“Our studies show that good redistributions – making sure that people have access to health, making sure that people have access to education, making sure that there is a progressive taxation not too high, not to disincentivize people, but progressive enough so that there is an element of distribution – that all of that is actually not counterproductive from a growth point of view.”

So, Amanpour asked, does she agree with Piketty’s conclusions about the danger of inequality?

“I have not finished his 600 pages. So I certainly would not want to agree with conclusions of a book that I have not finished.”

“He has some very interesting data. He has some good analysis. He has some very good and solid points. But I’m not going to say that I agree with all his conclusions.”

IMF chief says Egypt reforms ‘a must’

Egypt ‘economic reforms will be a must’

As Egypt approaches an election that former military chief Abdel Fatah el-Sisi is all but assured to win, the country’s economic situation – which has been a large cause of the country’s unrest – remains dire.

“The relationship with Egypt is not broken,” Lagarde told Amanpour. “We do have a relationship. We do provide technical assistance at the moment.”

“What we are seeing at the moment is rather – it’s not comforting, but it’s encouraging – you know, their determination to reform the energy subsidy.”

No matter who the next leader of Egypt is, she said, “economic reforms will be a must.”

“And if that is done thoroughly, decisively, I’m sure that there will be growth and investment. But the reform stage is certainly a condition to that.”