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Ukraine: IMF Directors Say Economy Fragile

Washington, 28 April 1999 (RFE/RL) -- Ukraine's economy remains very fragile, in the assessment of the Executive Directors of the International Monetary Fund (IMF).

Kyiv has made progress in a number of key economic structural areas, they say, but the continuing friction between parliament and the government adds uncertainty to the economic climate and heightens the risks to Ukraine's reform program.

The IMF director's annual review of Ukraine's economy, conducted in March and released Tuesday, praised the government's ability to steadily improve cash tax collections and the parliament's passage of a 1999 budget which included a provision to reduce expenditures further if necessary.

However, the IMF directors said they "regretted" parliament's decision to allow a tax moratorium on agriculture and to continue keeping taxes on electricity and imported gas and coal at zero.

Those two measures alone, they said, are having a significant negative impact on the budget and should be repealed along with reducing tax exemptions and ending the earmarking of revenues.

"There is an urgent need to increase cash revenues," noted the IMF directors, as a total part of the government's fiscal operations.

The directors recalled how the IMF had approved a three year extended loan program last September of over $2.25 billion, but that Kyiv's efforts went off track soon after the first drawing and it had to be put on hold.

In March, the board of executive directors declared Ukraine's program back on track and resumed drawings from the loan.

But even when Kyiv's program was halted last autumn, the directors said officials in Ukraine had worked to maintain relative stability despite the shock of Russia's financial crisis and continued to implement many reforms.

There was broad praise from the IMF directors for the progress Ukraine made in the last year in structural areas, such as reducing the number of employees being paid out of the state budget, moving ahead on several privatization, demonopolization and deregulation programs.

At the same time, they expressed regret that reforms in agriculture and the energy sector had been "inadequate or delayed."

The IMF directors also said they were concerned that fiscal structural measures, such as revisions to the personal income tax were still not in place.

Ukraine's handling of the restructuring of it's treasury bills held by nonresidents and some external debt that fell due in 1998 received commendation from the IMF directors. But at the same time, they said, Ukraine faces heavy debt-serve obligations in the next few years and only a vigorously implemented reform program will ensure the support of international creditors.

Ukraine's external debt totaled nearly 27 percent of its GDP (gross domestic product or the size of the economy)at the end of 1998. Repayments of over $2 billion are due this year.

The directors said that even with full implementation of the government's reform program and with support from international financial institutions and other multilateral creditors, Ukraine will still face a challenge, given the size of its foreign debt service obligations in relation to the level of its foreign reserves.

That's why Ukrainian officials must begin talking with foreign creditors to make sure that the country's debt servicing can be carried on in an orderly manner through the country's ups and downs. The fund's staff, in a background report prepared for the directors, said that for most of 1998, Ukraine continued to make progress toward economic stabilization, although inflation rose from 10 to 20 percent and the GDP declined by 1.7 percent.

Ukraine was hit hard by the Asian and Russian crises, which caused "significant capital outflows" to occur as investors pulled their portfolio and other investments. Overall, said the fund staff, Ukraine's public finances remain fragile, with uneven implementation of structural reforms.