Audit indicates that NBU misled IMF about reserves (05/14/00)

Audit indicates that NBU misled IMF about reserves

by Roman Woronowycz
Kyiv Press Bureau

KYIV - A report on alleged improper international currency transactions by the National Bank of Ukraine has determined that there is no evidence of any misappropriations of funds by the central bank in the last years. However, the report indicated that the NBU did mislead International Monetary Fund officials about its foreign currency reserves.

The audit, which was carried out by the leading international auditing firm PricewaterhouseCoopers at the request of the NBU and released on the IMF webpage on May 5, came after reports appeared in the London-based Financial Times newspaper in January that Ukraine's central bank had lied about the amount of its reserve fund to the IMF in order to obtain badly needed loans. The Financial Times stories also alleged that some of the IMF loans had been laundered out of the country into private foreign accounts.

Although the report does not make any conclusions regarding the propriety of the transactions it reviewed, the IMF released a statement on its website that suggests the extent of the NBU's culpability is limited to its misreporting of financial reserves.

"The NBU's reserve management practices may have allowed Ukraine to receive as many as three disbursements under the standby arrangement in effect at that time that it might not otherwise have been able to obtain," says the IMF statement.

IMF Director of Foreign Liaison Thomas Dawson expressed some surprise at information contained in the report on currency transactions that the NBU had not previously reported, although he admitted that for the most part the report only confirmed what the IMF had already known, according to Interfax-Ukraine.

PricewaterhouseCoopers reviewed 21 separate transactions amounting to about $1.28 billion made by the NBU from December 1996 to January 1998. It examined whether the central bank adhered to procedures for calculating net international reserves and net domestic assets, as required by IMF procedures. The auditing firm's report shows that by moving assets in a questionable manner, the NBU improperly padded its international reserves, chiefly gold and foreign currency, by an amount that varied from $391 million in September 1997 to $713 million in December 1997. It also details how the NBU double counted deposits made by Ukrainian commercial banks in December 1996 and November-December 1997 as both deposits into the central bank's international reserve fund and the commercial banks assets account with the central bank.

Valerii Lytvytskyi, chief advisor to Prime Minister Viktor Yuschenko, said on May 5 that the report and its analysis by international news media offers proof that Ukraine is not guilty of charges of corruption that had been leveled in this case. "All of them point out the absence of abuse or misuse of reserves," said Mr. Lytvytskyi.

He said that some of the reporting problems were technical in nature and a result of a learning curve that Ukraine had to go through as it made the transition from Soviet methods to Western ones.

"The technical problems emerged in connection with differences between the Soviet system of accounting and banking operations and the international standards to which the NBU transferred only in 1998," said Mr. Lytvytskyi. He explained that prior to 1996 Ukraine's currency reserves practically did not exist and that the central bank only learned how to maintain a currency reserve account through aid from international experts affiliated with international organizations such as the IMF and the World Bank.

Mr. Lytvytskyi pointed out that the NBU attempted to make all of its transactions transparent and maintained that all were reported to the IMF, including the two incidents of double counting.

Prime Minister Yuschenko, who has a keen interest in finding a resolution to the problem not only because he is the head of the Ukrainian government but also because he headed the NBU during the time frame in question, traveled to Washington this week for meetings with U.S. President Bill Clinton and IMF officials.

Before his departure Mr. Yuschenko said his goal is to convince IMF officials that the misreporting was done with no misguided intentions. "[The NBU transactions] were affected by neither political purposes nor anybody's private interest. This is the most important thing for us in the report on the first stage of the audit by the NBU," said Mr. Yuschenko.

He also stated his belief that IMF will continue its EFF (Extended Fund Facility) program with Ukraine and that the country can still expect to receive about $800 million by the end of the year.

The IMF, however, has said it will make no decision on how to respond to the PricewaterhouseCoopers report until its executive committee has done a full analysis.

"Once a final determination on misreporting is made, the executive board will decide what remedial actions may be appropriate," said the IMF on its website.

The international lending organization, through which Ukraine has received about $965 million of a $2.6 billion loan program since 1997, is also conducting its own audit to review the circumstances surrounding the misreporting done by Ukraine. Its Office of Internal Audit and Inspections is conducting interviews with NBU staff and management to determine what they knew, why decisions were made and why the monitoring systems failed. That report is due to be completed in June.

The IMF could take a number of actions in response to the report, ranging from tightening audit procedures to cancellation of Ukraine's loan program. Stanley Fischer, the IMF's first deputy managing editor told the Financial Times on May 3 that Ukraine most probably will be told to immediately repay the money it received based on improper reporting of its currency reserves.

In an earlier case, Pakistan returned money it had borrowed after similar disclosures were made.

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