UKRAINE’S ECONOMY SUFFERS THE EFFECTS OF A DETERIORATING FINANCIALSYSTEM.

The unwillingness of Ukraine’s parliament to passthe 1997 state budget and the government’s tax reform proposals– and thereby to convince the IMF to release the first trancheof a $3 billion extended funding facility (EFF) credit — seemsto be taking a growing toll on the Ukrainian economy. (UryadovyiKuryer, April 26 1997)

According to a report on the Ukrainian economy during the firstquarter of 1997 that was issued by the Council of Ministers inlate April, Ukraine’s successes in both keeping inflation down(to annual rates of around 20 percent) and the hryvnyastable do not appear to have broken inflationary expectations.The share of cash in the money supply grew to 44.3 percent inFebruary, suggesting that households and enterprises continueto mistrust the banking system and avoid longer-term financialinvestments. Inflation fears were apparent also in interest rates:commercial bank lending rates averaged 55 percent, even thoughthe National Bank’s refinancing rate was only 25 percent. Nevertheless,few enterprises were paying this 30 percent lending margin forlonger than a few months, so that only 11-12 percent of bank creditswent for long-term loans. Not surprisingly, fixed investment spendingwas down 17 percent over 1996 levels.

Without IMF funding, the government could be very hard pressedto find the $1.5 billion needed for external debt-servicing paymentsthis year, especially since Ukraine only attracted $116.6 millionin foreign capital during the first quarter. The $450 millionthat went to service Ukraine’s foreign debt during this time,therefore, could have been used to pay off wage arrears. Paymentsarrears in the electric power sector alone may have cost Ukrainethe bulk of a $317 million World Bank restructuring loan for thatsector, the disbursement of which is conditional upon the Ministryof Power Engineering reducing the number of unpaid bills. (LvivInfobank, May 23, 1997) The general unavailability of workingcapital is forcing customers to supply producers with needed rawmaterials, and the barterization of economic activity seems tobe growing as well.

Ukraine’s financial system, in other words, seems increasinglyunable to fund enterprises’ current activities, not to mentioninvestment projects. It is therefore difficult to see how enterprisescan attract the funds they need to restructure, or why economicactivity would emerge from the underground sector that is estimatedto be as large as the official economy.

Georgian-Chechen Contacts Gather Momentum.