IMF pays $1 bn bailout tranche to Ukraine; releases staggering report on cost of Mid-East conflicts

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Robert Williams | FlashRatings | Sunday, September 18, 2016 1:39 PM EDT
It has been a dynamic week for the International Monetary Fund, where on Thursday the Washington-based institution moved to pay a $1 billion tranche of Ukraine's long-frozen bailout package. Then Friday saw the publication of a staggering report on the economic costs of conflict in the Middle East.
Ukraine bailout
The IMF moved to disburse the first $1 billion of a long-delayed economic rescue aid package for Ukraine on Thursday, despite the war-torn country’s failure to meet key demands for reform.
The rescue payment is part of a $17 billion package agreed in March 2015 for which payout has been stalled by the Ukrainian government’s failure to tackle concerns on corruption and debt.
“Ukraine is showing welcome signs of recovery, notwithstanding a difficult external environment and a severe economic crisis. Activity is picking up, inflation has receded quickly, and confidence is improving,” IMF Managing Director Christine Lagarde said in a statement. “This progress owes much to the authorities’ program implementation… Determined policy implementation, however, remains critical to achieve program objectives, given the significant challenges ahead.”
The IMF’s move could pave the way for Ukraine to access other sources of aid and financial instruments including the issuance of US-guaranteed bonds.
Fitch ratings, however, maintained their CCC rating for Ukraine’s debt in spite of the access to IMF rescue funds.
“The IMF executive board's approval of a disbursement of USD1.0bn to Ukraine is positive but does not dispel concerns about Ukraine's ability to deliver on reforms,” Fitch Ratings said Friday. Ukraine's low sovereign rating reflects “the persistent risk of delays to flows of external support that underpin reserves and macroeconomic stability."

The World Bank estimates that Ukraine’s economy will grow 1% in 2016, after contracting by almost half between 2013 and 2015. 
Middle East conflict
An IMF staff paper on the economic costs of conflict found that in war-stricken countries including Iraq, Libya, Syria and Yemen, war and internal strife in countries such as Iraq, Libya, Syria, and Yemen had erased the economic gains of "a whole generation."
The case has been particularly grim in Syria, where school dropout rates climbed to 52 percent in 2013 and life expectancy has fallen to 56 years from 76 years before the war.
"After four years of intense fighting, Syria’s output is now estimated to be less than half its level in 2010, before the conflict, while inflation surged by almost 300 percentage points in May 2015, the latest available month of data," Managing Director Christine Lagarde said in a statement Friday. "We estimate that even with a relatively high annual growth rate of 4.5 percent, it would take Syria more than 20 years just to rebound to its 2010 pre-conflict GDP level."
Economic damage was also found to spill over borders into countries neighboring conflict. Jordan, Lebanon, Tunisia, and Turkey are all exposed to the challenges of hosting refugees, less confident markets, security costs,  and "declining social cohesion".
One lesson learned from the report, according to Madame Lagarde, is that countries facing internal conflict should focus on keeping fiscal institutions operational, and should prioritize spending carefully to preserve essential services.
The IMF stressed that international aid to conflict-affected zones should come preferably in the form of grants rather than loans, so as not to further strain their fiscal burden in the longer term.