IMF threatens to halt funding for Ukraine due to populist laws

The International Monetary Fund warned on Sunday that recently proposed changes to Ukraine's legislation threaten to undermine reforms critical for the successful reception of the country’s $40 billion bailout package from the IMF.

Pol Thomsen, director of the IMF's European Department, stated that seven bills submitted for consideration in the Ukrainian parliament could negatively affect important reforms regarding pensions and energy tariffs that Ukrainian lawmakers initiated earlier this year.

The Fund also condemned a separate law passed by parliament in early June, allowing Ukrainians to repay foreign currency loans at a more favorable exchange rate. According to some experts, this step could lead to the collapse of the entire banking system in the country. However, President Petro Poroshenko made it clear he would veto this law.

It should be noted that the IMF has become increasingly concerned about the Ukrainian economy due to the armed conflict with Russia-backed rebels in the east of the country. The Ukrainian government expects the economy to contract by 9.5% this year, with annual inflation likely reaching 48% compared to the previous year.

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The legislative proposals that prompted the IMF's condemnation show how lawmakers could easily revert unpopular reforms in favor of short-term assistance for the beleaguered public, jeopardizing Ukraine's already fragile economic recovery plan.

Ukraine has already implemented a number of key reforms required by the IMF. In April, gas prices for residential consumers increased nearly threefold, and electricity costs rose by an average of 50%. Lawmakers also approved pension cuts and tax increases. Currently, Ukraine has received $5 billion out of the $17.5 billion from the Fund.

However, international experts have rushed to condemn the recent steps taken by the government, particularly the controversial law passed on July 2 regarding the restructuring of foreign currency loans. The law allows borrowers to repay loans at a rate of 5.05 hryvnias per dollar instead of the current rate of 21.9 hryvnias per dollar. The National Bank warned that the law would lead the banking system to collapse due to a loss of 100 billion hryvnias ($4.6 billion).

The bill was passed with 229 votes. While the president condemned the law as populist, some of his prominent allies voted in favor, including parliament speaker Volodymyr Groysman. Mr. Groysman later stated in a Ukrainian television interview that he voted for the law because he had not read it.

On Sunday, the IMF warned that if this and similar laws are implemented, they could reduce Ukraine’s GDP by 2% in 2015 and by 3.5% in 2016.

'Reversing economic reforms for short-term gains harms Ukraine's economy, said Mr. Thomsen. - Ukraine must remain on the path of reforms, modernization of the economy, and responsible macroeconomic policy'.