Ukraine's current political crisis is being seen by some in Washington this week as a potential boon for economic reform despite the fact that problems deepened Tuesday after the country's parliament failed to approve President Viktor Yushchenko's candidate for prime minister.
Yuri Yekhanurov, the candidate supported by Yushchenko, missed being confirmed by parliament on Tuesday by only three votes. On Wednesday, Yuschenko spent 16 hours meeting with parliamentary factions in a failed attempt to break the deadlock.
Political analysts fear a period of political instability that could last until the parliamentary elections in March of next year but some economists hope the crisis, sparked by the dismissal of Yulia Timoshenko as prime minister on 8 September, will allow a more coherent economic policy to develop.
Albert Jaeger, the IMF's mission chief for Ukraine, told Emerging Markets that the Fund had in June 'felt compelled to point out publicly the need for a coherent set of policies' for the Ukrainian economy. 'But we prefer to concentrate on the opportunities that may emerge from the political crisis rather than the risks,' Jaeger said. 'In terms of efficiency, Ukraine starts from a low base and the growth prospects are enormous. The growth of the last four years was due to external factors rather than institutional reform, and those reforms can now be addressed.'
Anders Aslund, senior associate at the Carnegie Endowment for International Peace, welcomed Timoshenko's dismissal as 'the end of a total disaster that was comparable to the rule of Alan Garcia in Peru'. In the late 1980s, Garcia presided over Peru's worst economic decline in decades after provoking the ire of capital markets by setting a cap on foreign debt service payments.
'Ukraine is suffering a crisis of micro-economics, and resolving that is the government's job,' said Aslund, a former adviser to the Russian and Ukrainian governments who earlier in the year completed a UN Development Programme report on Ukraine.
'The biggest problem by far was the reprivatization debate, which undermined property rights. Second, there has been a substantial increase in the tax burden, up to 5-6% of GDP. Third, we have had wild government interventions on prices of fuel, meat and grain. Ukraine has been destabilized,' he added.
Economic growth fell from 12.1% last year to 3.7% in the first seven months of 2005, he noted.
The IMF's Jaeger pointed out that there was some progress towards exchange rate deregulation last month, but that the problem of the investment climate, caused in part by the reprivatization debate, has remained.