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Ukraine: Economic Prospects Remain Uncertain

Kyiv, 2 June 1998 (RFE/RL) -- The Ukrainian government last week announced its intention to cut the planned budget deficit for 1998, proclaiming this as marking the beginning of a new wave of reforms. But the announcement stopped short of providing details, creating doubt whether the measures will ever be fully implemented.

The May 29 announcement said that the deficit would be cut to 2.3 percent, down from 3.3 percent as approved by Parliament in December. Officials said more reforms will follow immediately as the cash-strapped government tries to qualify for a three-year $2.5 billion loan from the International Monetary Fund.

The decision to cut the deficit was prompted by the rapidly worsening financial situation. The IMF and the World Bank suspended their aid programs in April after the actual budget deficit in the first three months of 1998 doubled the planned target of 3 percent.

Most affected has been the market of Treasury bills (T-bills), issued by the Finance Ministry to finance the budget deficit. The ministry's payments for maturing T-bills have exceeded the funds the ministry raised from issuing new debt this year, reflecting foreign investors' reluctance to purchase the T-bills. Foreign investors had held last year half of Ukraine's T-bill market, but were purchasing only 10 to 25 percent of the securities in recent months.

Unable to restore foreign investors' interest in the T-bill market, the government borrowed over $1 billion internationally in February and March at a high 16 percent interest rate to cover budget losses and pay off part of wage arrears in the run-up to March 29 parliamentary elections.

The exodus of foreign investors from the T-bill market forced the National Bank to spend up to $1 billion to prevent the hryvna from falling.

But many observers say the government must start now raising over $2.5 billion to pay off mature T-bills and foreign debt in the next three months. This could lead to the drop in the value of the hryvna after June 20 when first debt payments have to be made.

The Finance Ministry can now sell only T-bills whose maturity period does not go beyond 1998, and analysts say that the government may again try to borrow at a high interest rate to cover its outstanding obligations amid growing concerns that the country may eventually go bankrupt. "The government behaves like the passengers of Titanic," said Volodymyr Dubrovsky of the Harvard Institute for International Development, describing the government's persistent policy of getting new loans to pay off old debt.

Meanwhile, serious structural reforms are still only being talked about. "We started talking about liberalization of foreign trade, bankruptcy regulations and new taxation policies five years ago," said Vitaly Migashko of ING Bank Ukraine. "Can anyone say today that at least some of these measures were introduced adequately?"

At the beginning of the year the government announced plans to lay off thousands of government employees by the end of the year to reduce budget expenditures and implement a number of deregulation measures. However, many of these measures are still to be introduced months after they were first discussed.

"What dominates the current Cabinet is concern with its own interests," said former Economy Minister Viktor Suslov. Having won election to new Parliament, Suslov resigned from the Cabinet last month after criticizing the anti-reform stance of its many departments.

The situation may be further worsened by tense relations between the government and the newly elected legislature. "Newly elected Parliament is not likely to be more friendly towards the government than the previous one," says liberal lawmaker Serhy Teryokhin, who was among the proponents of a radical tax reform in previous Parliament. "And with the government being politically and professionally weak, there are no reasons to believe in financial stability."

The government measures aimed to avert the financial crisis have to be approved by Parliament. But the legislature so far seems unwilling to do anything.