…BUT INFLATION REMAINS A PROBLEM.

Inflationary pressures are perhaps the most serious obstacle to a long-term recovery in Ukraine. Kyiv has not received IMF assistance in more than a year, and foreign investors continue to give Ukraine (and the rest of the CIS, except for Kazakhstan) a wide berth. The National Bank of Ukraine (NBU) has therefore had to issue new hryvnya in order to purchase the foreign exchange needed to stay current on Ukraine’s foreign debts. This has led to rapid monetary growth: M2 (currency plus hryvnya-denominated bank accounts) grew 49 percent during the first eight months of the year. Because the drought and Ukraine’s export growth have reduced food supplies and other goods on the domestic market, more money has been chasing fewer goods. Consumer price inflation rose to 32 percent in September, well above rates in neighboring Poland (10 percent) and Russia (19 percent), not to mention the European Union (4 percent). Inflation is therefore likely to significantly overshoot the NBU’s target rate of 19 percent for 2000 on the whole.

The resumption of IMF assistance is seen as the key to solving these problems, because it will allow Ukraine to service its foreign debts–and attract other foreign investments–without having to print more hot hryvnyas. But, while portfolio investors are unlikely to purchase Ukrainian securities until a new IMF deal is in place, the government has not given up hope on attracting foreign direct investment. Ukraine’s State Property Fund is preparing to sell majority stakes in twenty power distribution companies and four power generation companies to strategic investors. The sales, which are being prepared by Credit Suisse First Boston investment bank, are slated to begin next month, with offerings in electricity distributors located in Kyiv, Rivne, Zhytomyr, Sevastopol, Mykolayiv, Kherson and Kirovograd.

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