Ukraine’s already tangled relationship with its biggest creditor, the International Monetary Fund, became even more knotted this week as a visit by Prime Minister Viktor Yushchenko to Washington was postponed by two weeks until March 14-16.
Yushchenko was expected to meet with IMF representatives this week to secure – or at least continue discussions on – the disbursal of fresh tranches of the fund’s $2.6 billion Extended Fund Facility loan to Ukraine. The country is counting on renewed IMF aid to meet its foreign debt obligations this year, which include payments to the IMF itself.
Yushchenko aide Oleh Rybachuk said the visit was postponed due to the presidential candidate nomination campaign in the United.States, which ‘makes it impossible for [Yushchenko] to meet with a number of the necessary officials at present.’
Vice President Al Gore, who is presently campaigning for the Democratic Party nomination, heads the Kuchma-Gore Commission – a high-level diplomatic contact group between Kyiv and Washington.
But the Russian news agency ITAR-TASS, quoting sources in Washington, reported that Yushchenko’s visit to Washington was postponed ‘due to the aggravation of its relations with the IMF.’
Recent articles published in the Financial Times accused the government, and particularly the National Bank of Ukraine, of misusing IMF credits in 1997-98, and artificially inflating its reserves to meet the IMF requirements for new loans.
The articles caused outrage in Ukraine, and were blamed for the failure of the latest round of negotiations with the IMF in Kyiv earlier this month.
Commenting on the postponement, an IMF official in Washington lent credence to the ITAR-TASS report.
IMF External Affairs Director Thomas Dawson confirmed that the primary reason for the postponement of the IMF Board’s decisions on Ukraine lies in the recent reports in the Financial Times.
‘I think everyone knows, we have issues regarding misreporting data from 1997, 1998 that are still being looked into,’ he said.
The IMF has publicly supported an NBU-commissioned independent audit of the central bank’s hard-currency operations for the period involved, and has declared that Ukraine will have to wait for the outcome of the audit before the lender considers renewing loans.
The audit is currently being conducted by Pricewaterhouse Coopers, a leading consulting firm.
The audit will be conducted in two stages, covering periods between July 31, 1997-Jan.31, 1998 and Jan. 1, 1997-Sept. 30, 1998, and also transactions made by Credit-Suisse First Boston, a Swiss-based investment bank, through which the operations were conducted.
According to Dawson, the first stage of the audit covering the period of July 1, 1997 through Jan. 31, 1998, is expected to be finished by March, 31, 2000, after which the issue of granting new loans to Ukraine will be re-examined.
But analysts gave yet another explanation for the postponement of Yushchenko’s visit: They said there was little sense in the government seeking new credits in Washington until the situation regarding the restructuring of privately-held bonds is clear.
Ukraine is attempting to sidestep default on over $3 billion of debt repayments due this year by rescheduling previous debt issues, spreading the payments over a seven-year period. For the rescheduling to succeed, 85 percent of the bond holders must accept the deal.
The government is now conducting an extensive PR-campaign to get hundreds of private investors to exchange five existing bonds into seven-year securities.
‘The deadline for investors is March 15. And until the results of restructuring are clear, the IMF will not take any decisions,’ said Andrei Nikitchenko, London-based credit analyst of Commerzbank.
Nikitchenko saw no steep downturn in the IMF’s relations with Ukraine.
‘Fundamentally, the IMF’s attitude to Ukraine hasn’t changed,’ he said.
Nikitchenko suggested that the IMF is using the situation over the alleged misuse of its funds to squeeze as much reform progress out of Ukraine as possible, just as it itself is being squeezed by its donor countries to become more transparent.
‘The leverage is on their side, they will pressure Ukraine into structural reform,’ said Nikitchenko.
Another Kyiv-based economic analyst said that the IMF has presented Ukraine with a number of new, detailed requirements that Ukraine must meet before the EFF loan package is resumed. The new requirements even cover such matters as the privatization of certain enterprise, the analyst said.
But according to Yushchenko’s spokeswoman, Natalya Zarudna, these are follow-up actions tied to previous loans, rather than pre-conditions to new credits.
Meanwhile, Economy Minister Serhy Tyhypko warned on Feb. 24 that the IMF’s refusal to continue crediting Ukraine would result in a sharp devaluation of the national currency, starting in April, and a serious fall in the central bank’s hard currency reserves.
‘If [we fail to obtain new loans], then we can predict a significant reduction in the National Bank’s currency reserves as early as April-May. At the same time, we can also foresee [reduced activity] by our investors and foreign investors, which could create additional pressure on the hryvna,’ Tyhypko said.
Analysts said Tyhypko’s blunt statement on the potential damage Ukraine might suffer in the absence of new loans came as a surprise to many and indicates that the government might be starting to think about the worst-case scenario – no new IMF money soon.
Tyhypko hinted that if the loans are not disbursed soon, the NBU might consider dipping into its reserves to make foreign debt payments. Reserves currently stand at $ 1.15 billion.
In a further complication that might hold up the disbursal of the EFF loan, the IMF’s western backers are embroiled in a debate over who should succeed outgoing director Michel Camdessus as head of the IMF. While the fund is without a new director, its board is unlikely to take major decisions on releasing new loans.739
