Delegations from the International Monetary Fund and World Bank received a rather cold welcome in Kyiv this week – and not just from the weather.
On Tuesday, the second day of the delegations’ five days of scheduled meetings with government officials, President Leonid Kuchma issued a sweeping set of orders to his government that ran mostly in the direction the IMF and World Bank have been pushing: closing loopholes in tax collection, allowing mortgages on land and even turning over land plots to foreign investors.
At the same time, however, Kuchma asked his cabinet to draw up legislation exempting manufacturers of agricultural machinery for two years from all taxes except contributions to the pension fund and issued a series of ‘recommendations’ to the National Bank that included drafting a bill on the ‘state reorganization’ of Bank Ukraina into an agricultural mortgage bank.
Kuchma also said the draft 1999 budget should be revised to assume annual inflation of 20 percent rather than the 7.8 percent figure the cabinet used when preparing its draft. Most observers interpreted that revision as a not-so-subtle hint that the National Bank would have to cover the government’s persistent revenue shortfall by printing money.
The real doozy came on Wednesday, as Ukraine’s populist parliament began debating the budget.
‘Emission is not the monster you should frighten children with,’ Budget Committee Chairwoman Yulia Tymoshenko said as she presented her version of the budget to parliament. ‘We have whole sectors of the economy that can absorb emission money without any inflation.’
Among such sectors she named agriculture, agricultural-machine building and ship building – all huge loss makers.
Tymoshenko’s draft upped spending by a whopping Hr 13 billion ($3.7 billion at current rates), or 48 percent from the cabinet draft. It predicts greatly increased revenues from oil and gas extraction and transit, customs and collection of old tax debts. It also counts on borrowing $700 million on foreign markets and a ‘limited emission’ of cash by the National Bank.
In his address to parliament two weeks ago, Kuchma also called for the National Bank to print money and use it to support industry and agriculture, although he said it should be done through government lending from the National Bank and spoke out against ‘thoughtless emission.’
The cabinet draft anticipates revenues of Hr 22.2 billion and a deficit of Hr 680 million, or 0.6 percent of gross domestic product.
The Budget Committee draft plans revenues of 35.1 billion and zero deficit, which Tymoshenko called ‘a budgetary revolution.’
Experts both in parliament and beyond said both budgets are overly optimistic.
‘They are both unrealistic, but the parliament can approve an even more unrealistic budget because most of the deputies have no understanding of economics,’ said Viktor Suslov, a parliament deputy and former Economy Minister.
‘Absurd, sheer lunacy,’ commented Viktor Pynzenyk, a former deputy prime minister for economic reforms who now leads the liberal Reforms and Order Party.
‘One percent emission to GDP gives 2 percent inflation,’ Pynzenyk said. ‘If we’re talking about a 13 billion emission, we’ll have 25 percent of inflation per month – it’s a horrifying inflation, it’s hyperinflation.’
Nonetheless, Kuchma said on Thursday that negotiations with the IMF delegation were proceeding ‘normally’ and that he hoped their outcome would be ‘successful for Ukraine.’
The IMF ‘understands our position, and we are making steps to implement as fully as possible the fund’s conditions for the loan deal,’ Kuchma was quoted as saying by the Interfax news agency.
Although the IMF and World Bank delegations were, as usual, keeping quiet while negotiations proceeded, there were signs of pessimism from onlookers in Brussels.
The Unian news agency, covering a Ukrainian delegation’s meetings with European Union officials, reported on Nov. 30 that the EU has frozen a 150 million ecu credit tied to the IMF’s three-year, $2.2 billion loan program pending a decision from the IMF on whether its loan payments will continue.
So far, Ukraine has received two tranches worth $335 million since the program began in September. The delegation is in Kyiv to discuss the third tranche. The World Bank, which has loaned Ukraine $340 million since September, is likely to make its decision on whether to continue loans in tandem with the IMF.
IMF requirements to Ukraine include giving more independence to the National Bank, cancelation of all tax holidays and a ban on all types of currency emissions except through National Bank purchases of government treasury bills, which are to be gradually phased out.
Privatization of state stakes in commercial banks and ending government interference in commercial loans in general – a practice that has left Bank Ukraina virtually bankrupt – are conditions of IMF and World Bank loans.
It was unclear whether Kuchma’s call for ‘state reorganization’ of Bank Ukraina meant nationalization, as he called for in a Nov. 19 speech to parliament. A press release issued by Bank Ukraina on Nov. 24 said its director had agreed with Kuchma that nationalization was ‘premature.’
Parliament Speaker Oleksandr Tkachenko predicted on Monday that the final version of the budget will be approved by the end of this year – another IMF demand – but few dared to comment on what it will be like.
