UKRAINE BETWEEN EAST AND WEST.

While the summit of the CIS heads of state currently meeting in Chisinau may have attracted the big headlines, an IMF mission now in Kyiv may have greater significance for Ukraine’s medium-term economic prospects.

The visit by the IMF delegation, which began its discussions with Ukrainian officials on October 20, comes at an important time for Ukrainian economic policy. Ukraine is nearly alone among CIS countries in that signs of economic recovery are few and far between, with GDP expected to decline again in 1997, by some 5-6 percent. Although inflation has fallen to about 10 percent per year and the hryvnya remains stable (at around $1 = 1.87 hryvnya), the Fund refused to approve a $2.5 billion extended funding facility for Ukraine in July. A $542 million stand-by credit was authorized instead, but payment of the second and third tranches from this credit have not been made. In addition, the World Bank recently announced that it may cancel funding for three of its projects in Ukraine, totaling another $400 million.

These negotiations, moreover, are occurring against a background of what may be an increased Ukrainian willingness to "go it alone" — without assistance from the IMF and World Bank. A report on the "Economic Security of Ukraine" recently issued by the National Security Council in Kyiv reportedly called ties with international financial institutions "a key danger in the country’s economic security" and recommended that the government take a tougher stand in negotiations with the IMF.

Ukraine’s successful Eurobond placements on the European and Japanese security markets last month may have contributed to the belief that external finance for Ukraine’s current-account deficit can be procured without the IMF’s assistance. A Ukrainian-Japanese agreement announced last week that could provide as much as $5 billion in Japanese financing for Ukrainian imports could also reduce Ukraine’s reliance on official funding sources. (InfoBank, October 17) Whether Ukraine can really "liberate" itself from IMF funding is another matter, however. The hryvnya’s extensive appreciation in real terms during the past 12 months (a trend that makes Ukrainian exports less competitive), and the relatively small size of Ukraine’s foreign exchange reserves (compared to the country’s imports) suggest that Ukraine could well need increased IMF assistance in the medium term.

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