UKRAINE TRIES FISCAL RESPONSIBILITY.

In a surprising display of fiscal responsibility, the Ukrainian parliament on December 30 approved the 1998 national budget on its third and final reading. (Unian, December 30) This stands in sharp contrast to parliament’s treatment of the 1997 budget, which was passed only in August of last year. The fact that this year’s budget was approved in the run-up to Ukraine’s 1998 parliamentary elections made its passage even more surprising. Reformers have criticized the budget as unrealistic, however; and even if the budget holds together, it may not be able to halt Ukraine’s slide towards financial crisis.

According to the budget law, the deficit in 1998 is to be held to 3.3 percent of GDP. About a third of this deficit is to be financed by the sale of new government debt; the rest is to come from monetization, and from assistance from the IMF and other international financial institutions. However, former deputy prime minister Viktor Pynzenyk, a strong economic reformer and leader of the Reform and Order Party, called the budget "absolutely unrealistic." (Eastern European Daily, January 6) He underscored tensions between the budget’s goals of paying off wage and pension arrears and the financial squeeze in which the government has found itself since late 1997.

A collapse of the hryvnya in the wake of the capital outflows that followed Asia’s emerging-market turbulence in October was only narrowly averted by a major monetary tightening engineered by the National Bank of Ukraine (NBU). This tightening came about through NBU increases in reserve requirements for commercial banks to 15 percent, while the lombard rate (the rate at which banks borrow from one another) was increased to 45 percent by the end of 1997 — a figure that corresponds to real interest rates on the order of 35 percent. (Unian, December 13) Despite the NBU’s de facto reintroduction of exchange controls — Ukrainian banks are permitted to buy dollars only to finance imports — the demand for foreign exchange has on a number of occasions (most recently on January 6) pushed the hryvnya below the lower band (of $1 = 1.9 hryvnyi) of the NBU’s currency corridor. (Unian, January 6)

Ukraine’s financial problems have been further exacerbated by the fact that some $300-$400 million in treasury bills are now reaching maturity each month, and must therefore be redeemed through the issuance of new government debt at these punishingly high interest rates. Although improving tax collection or stepping up privatization efforts could help Kyiv raise the needed cash, the run-up to the parliamentary elections and the polarized state of Ukrainian politics make such steps unlikely. But if these measures are not taken, the IMF is likely to prove unwilling to provide increased funding. Ukraine’s stab at fiscal responsibility may still turn out to be too little, too late.

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