AUDIT REPORT DAMAGES RELATIONS BETWEEN KYIV AND THE IMF.

When Ukrainian Prime Minister Viktor Yushchenko’s mid-May visit to Washington was initially planned, discussions were expected to concentrate on regaining IMF support for Ukraine’s reform efforts. At stake was the resumption of disbursements from the US$2.6 billion Extended Fund Facility, which have been on hold since September 1999. Ukraine is slated to repay some US$800 million to the Fund this year, and lack of additional financing from Washington, combined with low foreign currency reserves, could put Kiev on the verge of a balance-of-payments crisis.

Ukraine’s economic performance was particularly impressive in the first quarter of 2000–GDP is reported up 5.6 percent during this time–and there are signs that the IMF is slowly moving towards resumption of financing. However, the discussions have been complicated by the May 4 publication of an audit by the PricewaterhouseCoopers international accounting firm. The report showed that Ukraine overstated its foreign exchange reserves by up to US$713 million in order to win US$200 million in loans from the IMF in 1997 (Reuters, May 5).

The possible misuse of IMF funds was first raised in a Financial Times interview with former Prime Minister Pavlo Lazarenko, who charged that high officials in the Ukrainian government and National Bank of Ukraine (NBU) had personally profited from the misuse of foreign exchange reserves that had been provided by the IMF. Yushchenko, who prior to his appointment as prime minister had been NBU governor, vehemently denied these allegations, and the NBU agreed to permit PricewaterhouseCoopers to perform an independent audit of its foreign exchange transactions during 1995-2000.

During the course of the audit, Ukrainian officials admitted that some of the NBU’s reserves were put in long-term deposits with foreign banks and used as collateral for foreign currency bonds issued in 1995. However, the auditors were unable to find any evidence that IMF funds had been used for personal gain, either in Ukraine or abroad. Instead, the NBU seems to have been guilty of overstating its foreign exchange reserves, in order to reduce the interest rate it had to pay on the bonds issued in 1995.

But instead of putting Ukraine back in the IMF’s good financial graces, the report and the surrounding atmosphere may have seriously damaged relations between the IMF and Kyiv. Ukraine is once again being “tarred with the Russian brush” since, in the wake of charges that IMF and World Bank monies were misused by the Russian government during the 1990s, the Fund and the World Bank are going out of their way to even avoid the appearance of improper lending to CIS countries. This could cause Yushchenko’s negotiations on the resumption of IMF and World Bank financing to drag on for weeks. In the end, Ukraine’s strategic importance as perceived in Washington could well result in the resumption of IMF and World Bank funding. From now on, however, Ukraine’s use of disbursements will be monitored more closely than ever before.

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