UKRAINE PLACATES IMF, INTRODUCES CURRENCY CORRIDOR.

Strained relations with foreign investors and the failure to pass the 1997 state budget have yet to spell the end to Ukraine’s financial stabilization or IMF funding. Instead, the introduction of a currency corridor by the National Bank of Ukraine was announced on April 25, and a visit by an IMF mission concluded that same day with a decision to release a $2.5-$2.7 billion extended funding facility (EFF) credit in support of Ukraine’s macroeconomic stabilization program. (Interfax-Ukraina, April 25; Itar-Tass, April 23; Vseukrainskiye vedomosti, April 16) Although these developments present Kiev’s squabbling politicians with a new opportunity to push forward with reform initiatives, it remains unclear whether they will take advantage of it.

Deputy Prime Minister Serhy Tyhypko announced at a press conference in Kiev on April 25 that the IMF delegation has decided that Ukraine’s economic performance in the first quarter of 1997 was in compliance with previous agreements with the Fund. This should help pave the way for the release of the first tranche of the EFF in June or July, with subsequent tranches to be paid out on a monthly basis. While releases will be conditional upon Kiev satisfying 41 macroeconomic and financial targets, Tyhypko said that Ukraine is currently in compliance with 20 of these targets, and the passage of the state budget would bring Ukraine into compliance with another ten.

Although the parliament’s failure to ratify the government’s fiscal legislation must be of great concern to the IMF, Ukraine’s progress this year in consolidating the financial stabilization recorded in 1996 is impressive. The hryvnya has appreciated against the dollar by some 15 – 20 percent (in real terms) since its introduction last August; inflation is running below the official 25 percent forecast for the year; interest rates on commercial bank loans and treasury bills have fallen significantly since January; and, beginning April 25, the National Bank of Ukraine has vowed keep the hryvnya’s base exchange rate to within a corridor of 1.7 to 1.9 hryvnya (to $1) for the remainder of the year (although fairly wide fluctuations around this rate will apparently be permitted).

On the other hand, the combination of large-scale wage, pension, and fiscal arrears, the parliamentary stalemate over fiscal legislation, tensions between President Leonid Kuchma, Prime Minister Pavlo Lazarenko, and the Communist-dominated parliament, and Ukraine’s continuing decline in GDP — which at the end of the first quarter was 7.9 percent below its first-quarter 1996 level — underscore the fragility of Ukraine’s economic progress. This cannot have been lost on the IMF: indeed, Tyhypko told the press conference that, prior to their arrival in Kiev, the members of the IMF mission had "formed the impression that economic reforms in Ukraine had been stopped". (Interfax-Ukraina, April 25)

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