Kyiv, 9 October 1998 (RFE/RL) -- Since Ukraine's recent agreement on a reform program with the International Monetary Fund (IMF), the country, like much of the region, has been hit by new economic problems. Some Kyiv-based international financial experts say that is complicating Ukraine's efforts to fulfill the program's aims.
A Ukrainian delegation, including Prime Minister Valeriy Pustovoytenko, Finance Minister Ihor Mityukov and National Bank Governor Viktor Yushchenko, has been meeting with IMF officials in Washington this week. They are discussing what must be done to obtain further tranches of $2.2 billion in loans that are attached to the reform program.
An outline of the program is posted on the IMF's web site, listing 83 areas where Kyiv would be implementing reforms. They include steps to ensure progress in stabilization, to create a smaller and more efficient government, to accelerate deregulation and privatization, and to reform the financial sector. Other criteria include steps to restructure key economic sectors, to improve competition, and to increase protections for the most vulnerable members of society.
Alexei Sekarev, an economic advisor with the Ukrainian-European Policy and Legal Advice Center, calls it "a very ambitious program for Ukraine." His research center is funded by the European Union. Sekarev says that it will be "very difficult for Ukraine to fulfill many of the conditions." But he says he believes that there is "a readiness on the part of the IMF" to be realistic about how many of the conditions can be met.
Ukraine's program for economic revival underwent drastic modification even as it was supposed to be getting off the ground.
By the time the government and the IMF board of directors reached a final agreement on the loan on Sept. 4, the Russian financial crisis had hit and many of the financial benchmarks written into original plans had become unrealistic.
In a letter to the IMF, the government indicated it would not be able to replenish the Ukrainian National Bank's depleted reserves as earlier promised. The letter also mentioned a new exchange rate band of 2.5-3.5 hryvna to the dollar, effectively devaluing the national currency.
The government also introduced a whole new set of financial benchmarks, including ones on gross domestic product, consumer price inflation, the state budget deficit, money supply, and foreign currency reserves.
Since then, the economic situation has deteriorated further. At the end of September the National Bank's foreign reserves stood at $1.80 billion, some $250 million short of the target.
Patricia Bartholomew, an economist at the Kyiv office of Germany's Commerzbank, says she expects more problems ahead. She says: "Ukraine needs to develop a competitive economy, but there has been trouble getting (legislation) through parliament." She expresses the view that the situation in Ukraine will "continue to frustrate the IMF."
Parliament has already postponed discussion of the budget until October 15, and is unlikely to approve it. Since July, Ukraine has issued seemingly inconsistent presidential and Cabinet decrees, some in line with goals agreed with the IMF, some taking a side-ways step, and some directly in opposition.
The clear conflict is between measures toward deregulation and steps that allow for government intervention in the economy, like protecting Ukrainian-produced goods, writing-off tax arrears, and expanding the list of excise exemptions on local goods.
Sekarev of the EU-funded research center speculates that the IMF may be willing to overlook measures that contradict the spirit of IMF policy so long as they don't specifically contradict agreed conditions and so long as most legislation remains consistent with agreed reforms.
IMF officials say that production goals and other targets and deadlines in the government's memorandum to the IMF are flexible.
Patrick Lenain, the IMF's top official in Kyiv, says "we know we have to remain flexible and we have to adjust." He said IMF officials "know a lot is not going to happen, or it will happen faster, or slower" than planned, and new measures may be necessary. Lenain went on to say that if criteria are not complied with, IMF officials will consider waivers.
While quarterly reviews will look at long-term trends, the IMF will also review Ukraine's progress before deciding to release each monthly tranche of the loan. The frequency may be an indicator that the IMF has doubts about Ukraine's ability to keep its promises. Only Russia has disbursements with the same frequency; other IMF country loans are regulated quarterly or even half-yearly.
The IMF money is critical to balancing Ukraine's budget, servicing other high-interest government debts, paying for imports, and maintaining the hryvna as a viable currency. Moreover, other loans from the World Bank are conditioned on the government keeping to the IMF program, and private lenders and investors rely heavily on the IMF as an indicator of Ukraine's economic prospects.
Commerzbank's Bartholomew expresses the view that "the IMF is in a very difficult position." She says "they don't want to seem too strict, they are trying to get as much reform through (as possible) without pushing it too far and causing a backlash against reform. But," she say, "they also don't want to be seen as a pushover."