IS UKRAINE LIKELY TO MISS ANOTHER TRANCHE OF IMF FINANCING?

The reports arriving from Ukraine over the last few days indicate the possibility of a delay in the disbursement of the first quarterly US$187 million tranche of International Monetary Fund (IMF) financing originally scheduled for March 2001 (Reuters, February 7). As of February 7, the Fund delegation had failed to reach an agreement with the Ukrainian government on conditions for the release of the tranche. Disagreement between the two sides has been reduced to three main issues. First, during the fifteen-month-long negotiations on the resumption of financing under the Extended Fund Facility (EFF) which was successfully completed in December 2000, the Ukrainian government committed itself to reducing the controversial tax on exports of sunflower seeds from 23 percent to 10 percent (as of January 2001). No recent further action, however, has been undertaken on this matter. Second, the IMF noted a worrisome decline in cash collections for supplies of electricity from 50 percent of total electricity bills at the end of last year to only 35.5 percent in January. Finally, the IMF demanded further clarification as to the methods and criteria used in the privatization of state property in Ukraine.

The two latter issues had been discussed during the entire period of negotiations in 2000. A clearer presentation of actions to be undertaken by Kyiv to address these problems will probably suffice for the time being: Tthe Ukrainian government recently reported that cash collections were already up to 48 percent in late January. The failure to enact an already agreed-to policy action, however, (the reduction in the export tax) seems puzzling at the least. According to Ukraine, there is not much the government can do to accelerate the process of lowering the tax. The proposed law was submitted to the Verkhovna Rada in December and was expected by the government to be approved shortly. As it turned out, however, the Rada went into recess in late December and reconvened only on February 6 (Vesti online, February 9, 2001). In addition, there is no guarantee that the Rada will come to an easy agreement on the legislation.

The importance of continued financing from the IMF cannot be overestimated. Ukraine survived more than a year without this source of external financing and as a result returned to increased monetary emission and higher inflation. The most important results of an active IMF program will be Ukraine’s ability to undertake long-delayed restructuring of debt owed to the Paris Club of creditors (US$500 million) and a reentry into international financial markets with a sovereign bond offering. Without further normalization of relations with foreign portfolio investors (given that the domestic government debt market remains dormant), the National Bank of Ukraine will once again be the government’s lender of last resort, raising inflationary pressures in the economy.

IS KUCHMA STRONG ENOUGH?