Less than two weeks after placing $450 million worth of 12-month eurobonds on the Luxembourg securities market, the Ukrainian government on August 25 learned that the IMF’s Board of Directors had officially approved the granting of a $542 million standby credit. Although the standby credit may not be as desirable as the larger and longer-term extended funding facility (EFF) for which Ukrainian officials had been hoping, the standby is another large step away from the financial meltdown that many observers were predicting for Ukraine this spring, prior to the June passage of the government’s 1997 budget and tax legislation.
The IMF deal seems to have had two immediate and inter-related effects on the Ukrainian economy. First, because it is conditional on the government bringing inflation down to 15 percent this year and 12 percent in 1998 (from the 40 percent recorded in 1996), the standby seems to be strengthening the willingness of the government and National Bank to maintain tight fiscal and monetary policies. This is apparent, for example, in the government’s decision in late August to lower 1998’s projected inflation rate from the 16 percent originally forecast to 12 percent. This rate for 1998 is to be accompanied by a budget deficit that is 4.5 percent of GDP, by GDP growth of 0.5 percent, and by an average exchange rate of $1 = 2 hryvnya over the course of the year.
Second, the IMF’s seal of approval is likely to improve the Ukrainian government’s chances of floating additional securities on international capital markets during 1997Ð1998. (See the Monitor, August 27) Finance Minister Igor Mityukov announced on August 30 that he expects Ukraine to receive credit ratings from Moody’s, Standard & Poor’s, and IBCA by the end of the year. This should make possible the emission of Eurobonds and yen-denominated "Samurai" bonds by both the national and municipal governments. The funds raised will in large measure be used to pay off wage and pension arrears Ñ which, according to Mityukov, have been declining since May. (Russia and Ukrainian agencies, August 26, 29, 30)
Armenia Signs Military Alliance with Russia.