Even before last month’s elections returned a dividedparliament, political gridlock between the government and the legislaturehad driven the budget deep into deficit. In the first quarter, outlaysoutran income by $667 million, more than double the target set in Ukraine’s1997 agreement with the International Monetary Fund. That means the IMFwill not disburse the $289 million that still remains in the $542 millionloan program. Without IMF support, foreign borrowing from commercialsources will be either impossible or prohibitively expensive. Efforts tofund the deficit from domestic sources are pushing interest rates tounbearable levels and could trigger a new round of inflation. The NationalBank of Ukraine, the country’s monetary authority, is offering over 40% perannum on short-term treasury bills, which would give borrowers a real returnof over 33% if inflation stays at the current 7% level. Interest rates atthese levels are likely to force further declines in economic growth andretreat into the “informal” economy, or alternatively capitulation by theNBU to pressure to expand the money supply at the risk of a new wave ofinflation.