Kyiv is warned about grain-trading rules; credibility of government reform plans at stake
Ukrainian government flew to Washington to smooth over a new rift in its relations with the International Monetary Fund, which is worried that the country could be reversing agricultural reforms and re-monopolizing its grain market, the Wall Street Journal Europe reported on Monday.
In addition to First Deputy Prime Minister Yury Yekhanurov, who is heading the mission, other members of the delegation include National Bank of Ukraine’s Chairman Volodymyr Stelmakh and Finance Minister Ihor Mitiukov. They are expected to start negotiations with IMF and World Bank leaders in Washington on Monday, Ukrainian News reported.
As part of the negotiations, which will end on Friday, the Ukrainian delegation is expected to meet with the IMF’s Managing Director Horst Koehler and the World Bank’s President James Wolfensohn.
While Yekhanurov had hoped to deliver an upbeat progress report on how the Ukrainian government has been putting its house in order during the past six months as the IMF investigated allegations that past loans to Ukraine were diverted. Instead, Mr. Yekhanurov’s team will be explaining a new batch of grain-trading regulations that, according to a letter co-signed by an IMF official, “destroys the government of Ukraine’s credibility in agricultural policy reform,” according to the Wall Street Journal Europe report.
In late June, President Leonid Kuchma signed a decree ordering the government to introduce a variety of restrictions on grain trading, which his administration says are aimed at stabilizing grain prices by discouraging traders from exporting grain too cheaply during the harvest season. Because of record poor harvests, Ukraine this year was forced to import grain, which led to higher bread prices.
But the regulations have drawn sharp criticism from the IMF and others, who argue that they undercut recent market reforms. A July 17 letter to the president’s administration signed by the U.S. ambassador and the heads of the IMF and World Bank offices in Kyiv said the decree “sends an alarming signal both to policy makers and private investors abroad.
“Only two months after making a policy statement that the government of Ukraine would not interfere in the grain and input markets, it is reinstating what is, in effect, a state order system,” the letter read. The letter went on to warn that the decree could stall Ukraine’s negotiations with the IMF and World Bank on new loans, “damage” Ukraine’s efforts to join the World Trade Organization and might lead the U.S. to “consider cessation of all bilateral U.S. technical assistance in agriculture.”
Mr. Yekhanurov said he remained optimistic about his visit. “We are phrasing the question this way: We want the IMF to announce that it will resume lending, but we don’t need the money immediately,” he said in an interview Friday.
Mr. Yekhanurov says his government has learned to live without foreign credits during the six months since the IMF launched an investigation into allegations that Ukraine misused loans received in 1996-1998. By cracking down on barter deals and eliminating various tax exemptions, he said, the government has increased revenue enough to clear off its pension arrears – something previous governments couldn’t do even with foreign aid.
Mr. Yekhanurov says his government wants the IMF’s nod of approval to help draw new foreign investment, restructure old debts and speed up reforms. “Even just one dollar would be enough,” he said. “What we need is recognition that we are moving in the right direction.”
Ukraine is trying to persuade the IMF to unlock a $2.6 billion (2.82 billion euros) credit line that has been frozen since September. About $1.6 billion of that amount remains to be disbursed.
Mr. Yekhanurov said it would “take some time” to work out differences with the IMF over agricultural policy. The government said last week that it had reached an agreement with the IMF and World Bank on the new grain-trading rules and had ordered local officials not to interpret them as a license to intervene on the grain market.
However, Gregory Jedrzejczak, who signed the July 17 letter on behalf of the World Bank, said local officials continued to use the new rules as grounds to control grain trading. He said the IMF and World Bank had formed a commission to work out their differences, “But we are not there yet. Our position remains the same.”
Serhy Feofilov, an agricultural analyst, said the main result of the decree was to spread confusion in the market and discourage investment in next year’s crop.
Indeed, it is difficult to imagine how the Ukraine delegation will regain the support of the IMF and World Bank with the decree in the way. Recent statements made by officials only confirm the government’s lack of interest in budging on the issue, as Ukrainian News reported.
According to the Deputy Agricultural Policy Minister Roman Schmidt, experts appointed by the Cabinet of Ministers to work with the Agricultural Policy Ministry have confirmed the need for state regulation of the grain market.
“Together with the experts, we are seeking a common understanding of the provisions of the [June 29 presidential] decree. We have achieved significant progress,” Schmidt said.
Schmidt said that he sent the preliminary findings of the group of experts to the government on July 27.
The group of experts includes representatives of the International Monetary Fund, the World Bank, and the Agricultural Policy Ministry.
Schmidt also said that the government would not initiate cancellation of the provisions of the decree as proposed by representatives of the International Monetary Fund and the World Bank.
“There will be no revisions,” Schmidt said.
An IMF spokeswoman said the grain decree would be one of the issues discussed when Mr. Yekhanurov meets with IMF Managing Director Hoerst Koehler on Thursday, according to the Wall Street Journal Europe report.
She said the IMF board hadn’t yet scheduled a meeting to discuss the results of the investigation into Ukraine’s use of past loans. The IMF has said the investigation, which is expected to wrap up next month, has so far turned up no evidence that any money was misallocated.
