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Ukraine: Government Takes Drastic Financial Measures

By Viktor Luhovyk and Natalie Tchourikova

Kyiv, 23 January 1998 (RFE/RL) -- Ukraine's government and the National Bank (NBU) have announced a new trading band for the national currency, the hryvnia, pledging to keep its exchange rate within 1.8-to-2.25 to the dollar this year.

According to NBU Governor Viktor Yushchenko, the new band was formed on the basis of unclear expectations about global economic development this year, and fears of a new financial crisis, which could cause a greater demand for dollars and devaluation of national currencies.

The announcement (Jan. 21) of the hryvnia trading band came in a package of other measures to be taken by the government this year to sharply reduce budget expenditures. The measures, in particular, include significant government staff reductions, and improvement in tax collection.

According to Prime Minister Valery Pustovoytenko, by implementing this plan, the government wants to keep the budget deficit this year at 2.5 percent of GDP, which is less than the 3.3 percent deficit projected for the 1998 state budget.

Bank Governor Yuschenko also said the hryvnia trading band was calculated on the assumption that inflation in Ukraine this year will not exceed 18 percent. Inflation was about 10 percent in 1997.

Viktor Lysytsky, advisor to NBU governor Yushchenko, today told RFE/RL that a high budget deficit, and a dangerous level of government borrowing were among the reasons for the introduction of the new trading band, or exchange-rate corridor. However, Lysytsky said he expects the upper level of 2.25 to the dollar could be reached only under the worst circumstances. "I am almost sure that hryvnia will not cross the two-to-one threshold." He noted that the NBU currency reserves of more than $2 billion would be enough to keep the hryvnia within the limits of the new corridor.

Financial analysts had said that the exchange-rate band previously announced (1.75-to-1.95 to the dollar) was overly optimistic. The official hryvnia rate has fallen to about 1.9, since the beginning of the year.

But, Yuschenko said the new hryvnia fluctuation band and inflation rate forecasts had been agreed with the International Monetary Fund (IMF).

The NBU barely managed to keep the hryvnia rate within the promised band of 1.7-to-1.9 last year when foreign investors started fleeing Ukraine's Treasury-bill market.

Keeping the hryvnia rate within the fluctuation band, which was announced primarily to attract foreign investors, is crucial for the government, since the money it draws from Treasury bills is a primary source for covering the budget deficit.

The IMF Kyiv office also issued a statement reading: "The IMF supports the decision by the NBU and the government to widen the exchange rate band of the hryvnia in the context of a strong stabilization package. Widening the band is an appropriate response to the recent turbulence in international flows to emerging markets. The IMF staff also welcomes the decision of the President and the government to reduce the fiscal deficit and accelerate structural reforms. The new band...will help Ukraine protect its official international reserves. These decisions are consistent with recent discussions with the IMF staff under the existing stand-by arrangement," the statement concludes.