Too flexible

The global financial crisis has had a continual capacity to surprise policymakers and the latest unpleasantness would appear to be the failure of the IMF-backed stabilization program in Ukraine barely a month after it was announced.  As we noted at the time, the program emphasized a flexible exchange rate, to avoid blowing reserves on a futile defence of a peg (something on which the Fund’s reputation took a hammering during past crises in Russia and Argentina).  But the effect seems to have been a worst of both worlds situation where the failure to establish a credible range for the hryvnia led to a severe loss of confidence in it, with the result that the IMF loan is essentially covering a dollarization of the economy.  Ukraine had the bad luck to have a dollar benchmark for the exchange rate just as the dollar was sharply appreciating.  If they had been coming into the stabilization plan with a history of pegging against the euro (or sterling!) things wouldn’t look so bad.  One lesson would appear to be that planting an economic stabilization plan into unresolved political instability doesn’t work so well.  The Fund may look at Romania with a more jaundiced eye as a result.

3 thoughts on “Too flexible

  1. “The Fund may look at Romania with a more jaundiced eye as a result.”

    Could you please elaborate on this statement.

    Thank you

  2. Honterus, my understanding from news stories like this one from Bloomberg is that Romania is now in what could be a prolonged waiting period while a new coalition tries to form following the election, and whatever government comes in will be facing a worsening economic situation. So I think there is a dilamma for the IMF in terms of any rescue package: who to negotiate with?

    Paul C — (again here’s a link to Bloomberg), it looks like the Fund is still willing to give Ukraine a chance to come out of it on its own, but any drastic measures on the exchange rate would force some kind of official reaction from them.

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