HAS ECONOMIC RECOVERY IN UKRAINE BEGUN — WITHOUT IMF ASSISTANCE?

Recent official data suggest that Ukraine’s long economic decline may finally be ending. Although Ukraine is out of compliance with its IMF memorandum of understanding, Kyiv seems to be increasingly able to secure external financing for its budget and trade deficits without the Fund’s assistance.

Recent Ukrainian press reports point to a consolidation of favorable economic trends. Deputy Prime Minister Serhiy Tyhypko announced on October 31 that GDP for the third quarter of 1997 was unchanged relative to the third quarter of 1996, while First Deputy Economy Minister Vasyl Shevchuk announced the day before that industrial production rose by 5 percent in September compared to August. (AP, October 31; UNIAN Biznes, October 30) Inflation is expected to fall to 10-12 percent this year (from nearly 40 percent in 1996), and the National Bank of Ukraine’s foreign exchange reserves as of late October were $511 million, well above the $307 million figure stipulated in Ukraine’s memorandum of understanding with the IMF. (Eastern European Daily, October 24)

The growth in official reserves reflects Kyiv’s ability to attract private financing for its budget and current-account deficits. Chase Manhattan issued Ukraine a credit worth $99 million on Oct. 23, following a similar credit of $369 million issued in August by Japan’s Nomura investment bank. (Ukrainian TV, October 28) The Japanese rating agency Nippon Investor Service then gave Ukraine a BB+ credit rating on October 28, which is expected to pave the way for the issuance of some $450 million in yen-denominated "Samurai bonds" on Asian markets later this year. This is in addition to some $500 million in Eurobonds that Kyiv expects to float on Western European capital markets, also by year’s end.

This news broke during a week when IMF officials were in Kyiv, discussing prospects for unblocking the October tranche of the stand-by credit that had been established for Ukraine in August, but from which payments were halted in September due to the government’s failure to hit the Fund’s budget deficit targets as well as accelerate the pace of privatization and banking reform. The timing suggests that Ukrainian officials may have wanted to show the IMF that the Fund’s leverage over developments in Ukraine is weakening. Kyiv could still overplay its hand, however. GDP in 1997 is still forecast to decline by some 5 percent, and despite these foreign credits, direct foreign investment in Ukraine during the first nine months of 1997 was some 50 percent below 1996 levels. (UNIAN Biznes, October 30) Moreover, the recent instability on Asian capital markets suggests that the samurai bonds may not provide the Ukrainian government with as much revenue as anticipated.

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