UKRAINIAN CURRENCY UNDER PRESSURE.

On January 21, Prime Minister Valery Pustovoitenko and National Bank Chairman Viktor Yushchenko announced that the currency corridor of 1.75-1.95 hryvna to the dollar was being widened to 1.8-2.25, the hope being that the new corridor could be sustained for the remainder of 1998. As of January 26, the hryvna was trading at 1.924 to the dollar (Ukrainian agencies, January 23 and 27)

The exchange rate has weakened as investors have grown increasingly pessimistic about the prospects for economic revival in Ukraine in 1998. Yields in the T-bill market rose from around 20 percent last September to the 40-50 percent range this year. This makes it increasingly costly for the government to finance the budget deficit, not to mention service the 4 billion hryvnas in T-bills issued last year. Although the National Bank has an estimated $2 billion in reserves, it was unwilling to sink these into an abortive effort to preserve the former exchange rate. However, devaluation may make it even more difficult to attract investors in the future, as future declines in the hryvna’s value will eat away profits. It did not help that last week the Rada rejected a government proposal to cut taxes on T-bill operations (currently 30 percent). Vice Premier Serhy Tyhypko came back from a visit to Washington on January 23 with good news: He said that the World Bank had approved additional credits of $1 billion to Ukraine. (Ukrainian TV-1, January 28)

Last summer, the IMF suspended payments under its Extended Fund Facility due to violation of its conditions, but instead approved a $550 million stand-by loan in August, of which Ukraine has received a total of $200 million to date. The government agreed to a new set of targets for 1998 with an IMF mission that visited Kiev earlier this month. GDP is expected to grow (by around 0.5 percent) for the first time in six years. Inflation in 1998 should be held to 18 percent — above the previous target of an earlier planned inflation level of 10 percent for the year. (Ukrainian Financial News, January 25) The deficit should be held to 3.3 percent of GDP (not including revenue from privatization). Some commentators believe even these relaxed projections are too optimistic. The Soros-funded International Center for Policy Studies predicts GDP will drop by 1.5 percent this year, which will lead to lower-than-expected tax revenues and increased pressure on the budget.

More disturbing news came on January 21, with the announcement that the State Property Fund was canceling the sale of a 24-percent stake in the regional energy company Donbassenergo, which generates 15 percent of Ukraine’s electricity. The decision was a blow to CS First Boston, Creditanstalt and Britain’s Schroders group, which had bid for the shares. The cancellation stems from the Rada’s December 11 decision to override an August 1997 presidential decree that allowed foreign companies to bid in privatization tenders.

Yeltsin to Support Kuchma in Upcoming Elections.