THE IMF COMES TO THE RESCUE… SORT OF.

The International Monetary Fund’s Board of Directors on November 27 finally approved the release of two tranches worth $103 million of Ukraine’s $542 million stand-by credit. (Russian agencies, November 27) Although the IMF announced that these funds had been released because of recent progress made by Ukraine in its macroeconomic stabilization, the Fund may also be trying to help Ukraine weather the financial crisis it is now experiencing.

The IMF decision follows months of tensions with Kyiv. The Fund this summer had refused to grant Ukraine a long-sought, three-year $2.5 billion extended financing facility, and provided instead the $542 million stand-by credit. Disbursements from this credit were suspended in September following the first payment (of $49 million in August) because of IMF objections to Kyiv’s decisions to pay off back wages, and because of a general concern about the slow pace of structural reform. Meanwhile, Kyiv appeared ready to float nearly $900 million worth of convertible bonds on international capital markets, and government officials seemed to suggest that Ukraine no longer needed the IMF’s assistance.

What has changed since this summer? In terms of Ukrainian economic policy, not much: reform initiatives are increasingly falling prey to political battles associated with the upcoming parliamentary elections and with the ongoing struggle between President Leonid Kuchma and the Ukrainian parliament. Change has instead occurred in Ukraine’s finances, and in emerging markets around the world. Portfolio investors began in October to desert many emerging capital markets; this trend has accelerated in Ukraine since mid-November. The National Bank of Ukraine responded last week with steep increases in interest rates — the NBU’s refinancing rate rose from 15 percent to 35 percent between November 15 and 26, while the bond market at about the same time pushed yields on Treasury notes from 22 to 40 percent. While these rate increases may have helped stem the outflow of capital, they have also forced Kyiv to put its plans for raising private capital on hold.

The IMF’s willingness to re-authorize standby payments would thus seem to come at an important time. There are some doubts, however, about whether the $103 million will do the trick. Ukrainian finance minister Igor Mityukov complained on November 28 that these funds represented a 30 percent decline from the levels Ukraine had been promised, and he charged that Ukraine was the victim of IMF "discrimination." (Russian agencies, November 28)

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