The ongoing, and intensifying conflict in eastern-Ukraine has had a predictably disastrous effect on the country’s economy.
By the end of 2014 it is predicted that the country’s GDP will have fallen by 10 percent and its currency - the hryvnia - will have lost nearly half of its value against the US dollar. Ukraine’s national debt is also soaring and could be as high as 70 percent of its GDP by the end of the year.
On top of that, inflation has hit 19 percent meaning that citizens are facing a situation where the economy is shrinking and prices are rising.
The International Monetary Fund (IMF) agreed to help Ukraine, and pledged in April to lend $17 billion to the country over two years. Other donors have also agreed to give money to the country, the total amount pledged has come to $27 billion.
In April this figure was deemed enough to stop the country entering a default and to start the process of rebuilding the economy. But since then fighting in the east has intensified, and the country’s GDP has been falling at twice the rate that the IMF originally forecast.
So far $7 billion of the agreed funding has been given to Ukraine - this has been enough to keep the country afloat, but not enough to start rebuilding the economy.
Loans from the IMF always come with strict conditions, and the country will be required to implement a number of austerity budgets and to introduce reforms to curb corruption.
When you pair the austerity deal with the falling GDP the cuts in government spending are expected to be at the same level that they were in Greece after the country was bailed out.
It now seems that the IMF is not going to give the country any more money this year, as it was previously expected to. They want to wait until a new government is formed next year.
Slow reform
Economic problems are not just linked to the conflict, 20 years of slow reforms and economic mismanagement mean that the average Ukrainian is now worse off economically than they were when the Soviet Union collapsed.
Privatisation in the 90’s lead to massive amounts of wealth being accumulated by a small number of individuals and did not improve life for most of the population.
The IMF is now facing up to the reality that the country will need a bigger loan. Speaking to NBC over the weekend, the IMF’s deputy managing director David Lipton commented that it is, “very hard to imagine how the finances of Ukraine can be kept under control” while the conflict in the east of the country continues.
Since sightings of Russian troops coming over the Ukrainian border were reported earlier this month, the value of the hryvnia against the dollar has plummeted, and hit an all-time low.
For the Ukraine the only real solution is an increase in foreign investment into the country, but that cannot come until the conflict ends in the east of the country, and right now that doesn't look like happening anytime soon.
If the fighting does continue then the country will be forced to either default or to continue to live off of a drip feed of funds from the IMF, Europe, the US and whoever else is willing to help them out.
