International Monetary Fund recommends that Ukraine receive loan of $2.2 billion (08/09/98)

International Monetary Fund recommends that Ukraine receive loan of $2.2 billion

by Roman Woronowycz
Kyiv Press Bureau

KYIV - The International Monetary Fund said on July 31 it would recommend to its executive board that Ukraine should receive a $2.2 billion (U.S.), three-year loan after an IMF mission concluded that the Ukrainian government was finally moving forward on intensive economic reform.

The announcement came after months of negotiations and with Ukraine seriously short of currency to meet scheduled August debt payments of almost $1 billion (U.S.).

"We have reached a tentative agreement with the Ukrainian authorities on a program of stabilization and restructuring of the economy," said Mohammed Shadman-Valavi, head of the IMF mission team that had been in Kyiv negotiating the final agreement with government officials since July 23.

Mr. Shadman-Valavi said the IMF was pleased by the series of economic decrees that Ukraine's President Leonid Kuchma had issued beginning on June 18 to improve the business environment and create conditions for economic growth. According to the IMF press release that accompanied the announcement, these include measures to rationalize the tax structure and reduce the tax burden on business; strengthen fiscal and monetary institutions, launch administrative reform and rationalize the size of budget structures; adopt transparent privatization procedures to further de-regulate the economy; reduce government intervention in economic activities; and reform the energy and agricultural sectors.

Vice Prime Minister for Economic Reform Serhii Tyhypko, who announced the agreement with the IMF mission head, said the two sides had no outstanding points of contention. "We have reached complete understanding on all the issues that we discussed. Members of the mission have positively assessed our work," said Mr. Tyhypko.

The Extended Fund Facility (EFF) that Ukraine had been seeking since last year will be disbursed to Ukraine over a three-year period and will help the country generate other international credits through public and private lenders, as well as give it a financial cushion on which to fall back.

Among the other credit opportunities that are now within Ukraine's reach is a $750 million loan from the World Bank, which the financial organization had said was dependent on Ukraine first obtaining the EFF.

For Ukraine - which has severe revenue collection problems and has suffered through the aftershocks of the Asian financial crisis - that money is expected to to counter any immediate danger of financial collapse.

"I am confident that with our implementation of the International Monetary Fund program the threat of financial crisis for Ukraine will disappear," said Vice Prime Minister Tyhypko.

The country has experienced a large shortfall in tax revenues chiefly due to a shadow economy worth $12 billion (U.S.) annually. In addition, its privatization program has achieved merely 25 percent of the target levels that were predicted for the first half of 1998. Privatization Fund Chairman Oleksander Bondar told the Kyiv Post that the fund's shortfall would amount to about $500 million for the year.

Ukraine had been borrowing heavily on the international bond market since the beginning of the year, when the IMF refused to grant several tranches on a stand-by loan worth some $500 million that Ukraine had expected to receive. The IMF had said at the time that, without renewed movement on economic reforms, Ukraine would not receive any further assistance.

This month the country is scheduled to repay some of those loans, including a $450 million fiduciary loan from the Nomura International Investment Bank.

The IMF had been under some pressure from the United States to grant the EFF, as well as from leading economic experts, such as Harvard University economist Jeffrey Sachs, who said in Kyiv earlier this year that the IMF must be more flexible towards Ukraine in its reform demands because a very real threat existed that while the IMF negotiated, the Ukrainian economy could collapse.

The international financial organization showed that it is able to compromise by agreeing that Ukraine could meet EFF requirements by maintaining a 3.3 percent budget deficit in 1998, instead of the 2.5 percent deficit it had demanded earlier. In 1999 the IMF expects Ukraine's budget deficit to be no higher than 2 percent.

After the announcement by the IMF mission that it would recommend approval of the EFF, U.S. Vice-President Al Gore, who was in Kyiv the day the IMF mission arrived and who had expressed qualified support for the extension of the loan, released a statement in Washington. Vice-President Gore said he was "greatly encouraged" by the agreement, according to the Kyiv Post.

"President Kuchma knows that he and Ukraine's Parliament must take strong, decisive steps to implement these reforms and begin a new era in Ukraine's economic policy - one marked by sound public finance, an improved climate for private investment and expanded economic opportunity for the people of Ukraine," said Mr. Gore.

Ukraine is expected to receive a first tranche of $250 million immediately after approval, with $850 million expected the first year.

The IMF executive board is scheduled to consider the $2.2 billion loan the week of August 24, which should give Ukraine a much-needed gift on its seventh anniversary of independence.