IMF management recommends release of new loan tranche to hard-currency-strapped Ukrainian government
The International Monetary Fund announced on March 16 that it is ready to resume landing to Ukraine, a move that would effectively save Ukraine from a debilitating default on its state debt.
Citing Ukraine’s improved revenues, better-controlled expenditures and ‘significant’ structural reforms, the IMF said in a statement that its management would recommend to directors at a board meeting later this month that lending to Ukraine be resumed.
The positive recommendation from IMF management makes it all but certain that the IMF board will vote to disburse a tranche of money under the three-year, $2.2 billion loan program that the IMF agreed upon with Ukraine last September and suspended two months later.
The IMF statement did not say how large that tranche was likely to be or when exactly the board would meet, and there was no other immediate comment from the IMF. However, Ukrainian officials, who had been speaking increasingly confidently about the upcoming IMF board meeting, have said they are expecting a $157 million loan tranche to be approved on March 24.
The resumption of IMF lending would also trigger the release of large World Bank loans and a smaller European Union loan that were frozen in concert with the IMF’s. It might also help persuade other institutional lenders to loan money to Ukraine.
The announcement followed a series of IMF-pleasing moves by Ukrainian authorities over the previous week, including a restructuring of government, an increase in residential utility rates and a proposed 10 percent cut in government spending from levels approved in the 1999 state budget.
Perhaps the surest signal that a positive decision was forthcoming was a March 13 report by the Interfax news agency that the Ukrainian government had agreed to increase its annual contribution to the IMF by $93 million, or 37 percent.
The IMF statement said that since November ‘authorities have embarked upon a major fiscal adjustment effort’ and ‘implemented … significant reforms in the areas of restructuring of government, privatization, deregulation, demonopolization … adjusting the prices of communal services.
‘Steps are also underway to strengthen reform in the agriculture and energy sectors,’ according to the statement.
If IMF support is renewed and continues through October, it will be a major boon to President Leonid Kuchma’s re-election hopes. If Ukraine gets no bailout, it will be a major boon to his opponents, especially the leftist ones.
Financial analysts had been widely predicting that without new IMF money Ukraine would not be able to meet all of the hard-currency debt payments it must make this year. Ukraine has been restructuring rather than paying off most of its hryvna-denominated debt since the Russian default last August.
Ukraine’s hard-currency reserves stood at a paltry $685 million at the end of 1998, an amount that Ukraine’s 1999 debt-payment schedule would have depleted by mid-year. Any default would almost certainly be accompanied by a drastic devaluation of the hryvna, which has already lost almost half its value since the Russian default.
National Bank Governor Viktor Yushchenko said at a March 15 news conference that on Feb. 26 Ukraine had paid $90 million on a 1 billion German mark Eurobond issued in 1998 and on March 17 would pay $80 million on a 500 million euro Eurobond also issued last year. Ukraine is also due to make regular payments on older loans from institutional lenders such as the IMF.
Ukraine has been unable to sell new debt since the Russian default, although the National Bank buys some hryvna-denominated debt as an indirect method of emitting money. Nonetheless, Yushchenko contended that Ukraine’s hard-currency reserves have not declined below the criteria outlined by the IMF.
‘By March 10, the NBU was up $77 million on the [IMF] criteria,’ he said, adding that he expected the decline in the volume of currency reserves to total about $100 million for the first quarter of 1999.
The IMF statement didn’t make clear whether the IMF was asking the government to cut its spending from the 1999 budget levels. Finance Minister Ihor Mityukov told a March 11 Cabinet meeting that revenue levels, although improved, were still below projections in the 1999 budget and recommended a 10 percent spending reduction across the board. He said a planned reduction would be better than ad hoc reductions in the form of arrears.
The statement also left the perennial sticky issue of the state’s wage and pension arrears unmentioned. When IMF lending was suspended in November, government officials were saying they wanted to pay arrears by cash emission, which the IMF strongly opposed.
On the same day as the IMF’s announcement, the National Council for Social Partnership issued a recommendation that the government create a statutory fund for servicing the wage arrears of state enterprises.
The proposed fund would be built on the proceeds of privatization auctions and the closure of bankrupt enterprises. The plans remain theoretical, however, and echo promises by the government to use the proceeds of compensation certificate auctions last year to pay off unpaid wages and pensions.
One measure specifically praised by the IMF was a March 1 decision by the government to raise residential utility rates by 20-25 percent. A day before the move, the Constitutional Court had nullified a parliament ban on such increases.
The IMF and World Bank had complained that low household utility rates amounted to subsidies paid by the energy sector in the form of debts for fuel supplies, unpaid taxes and wages, and negative investment in energy infrastructure.
The IMF’s praise of ‘restructuring of government’ apparently referred to a March 13 presidential decree reorganizing some parts of government. The decree reduced the ministries of family and youth, science and information to the status of state committee, while the State Committee for Oil and Gas was abolished and merged with the Energy Ministry.
The reform may have answered IMF complaints about duplication of responsibilities among government organs but appears to leave IMF complaints about the overall size of government unanswered.
‘It’s not clear to me why these measures are sufficient to appease the IMF, as they fall short of real Cabinet reform and make no mention about reduction of the state apparatus,’ said Hlib Vyshlinsky, an analyst at the International Center for Policy Studies in Kyiv.
‘We haven’t heard anything about plans for staff reductions; so far the decree only involves a change in our status to a state committee,’ said Olena Vasylkivska, assistant to Valentyna Dovzhenko, the newly demoted minister of family and youth policy.
