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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

HARD CURRENCY LOAN At the price of a second presidential term?

13 November, 2012 - 00:00

According to the optimistic government predictions, on August 24 the IMF board of directors will grant Ukraine an EFF loan of $2.2 billion. For this the President will have to issue a decree on sequestering budget appropriations.

According to the Constitution, the Parliament was to adopt the budget, but it refused to do so, because according to Speaker Oleksandr Tkachenko, the People’s Deputies did not want to be responsible for the budget corrections. If the President signs solid cuts in social spending, “he will be politically responsible for depriving the poorest walks of life of salaries and pensions,” says Budget Expenditures Subcommittee Chairman Oleksandr Turchynov.

With the loan in the offing, the politicians are making promises right and left. The budget supported realm, to which the state owes over Hr 6 billion, was promised an immediate salary payoff, domestic manufacturing revival, private business tax reform, investors transparent privatization, the stock market prosperity, and foreign creditors their money returned. However, there are more than enough people in Ukraine and abroad who do not believe that Ukraine will fulfill the loan conditions or use it wisely. There are especially many such doubting Thomases abroad.

England’s Financial Times recalls in its Saturday issue that Ukraine already has a long list of violations of IMF conditions. Ukraine also has to return $1.6 billion of foreign debt by January 1999, which according to one of Kyiv brokerage, is equal to the currency reserve of the NBU. Naturally, NBU’s reserve is not made of rubber and cannot be stretched in all directions. This is why it is expected that the major part of the new loan will be used to cover old debts. Moreover, this prediction is indirectly supported by the fact that England’s Barings Bank is ready to grant a private loan of $250 million at 18% annual interest to the Ukrainian government to pay off the debt to the Nomura investment bank. On August 12 Ukraine has to pay $450 million to this bank alone.

The New York Times in ten days ago recalled the numerous attacks on the IMF by Parliament Speaker Oleksandr Tkachenko, who “often expressed his suspicion and distrust to IMF charity, which has the purpose of eating up Ukrainian independence.” Apparently after journalists’ investigation, the newspaper came to the conclusion that Leonid Kuchma managed to calm him down in view of the loan to be granted by writing off the debt of his well-known Zemlia i liudy (Land & People) Association.

Still, it is a holiday for Ukraine, or to be more exact for its top politicians. The government expects the first installment of not yet granted loan, expected to total $250 million, to come in September. The Ministry of the Economy also hopes that the World Bank will unblock its credit lines after the IMF and grant up to $350 million to cover the budget deficit and mines closing. They expect another $200 million from the European Union. Ukrainian bankers perpetually speak of possible financial market stabilization due to the IMF loan.

They maintain that this, however, will not assist investing in domestic bonds. Last week the government issued a resolution On Additional Issuance of Domestic Bonds for 1998, stipulating an emission of from Hr 600 million to one billion. Interfax-Ukraine reports that ING Bank N.Y., London dept., intends to buy this up.

The hryvnia is likely to stay in the limits of the currency corridor, which will make it possible to keep inflation within the planned 25% limit. The hryvnia fell 7 points last week at the bids of Ukrainian Interbank Currency Exchange. The dealers think that the NBU formed the major part of the demand (almost $5 million) in order to demonstrate market stability. But the market was not active: the bankers expect the NBU to reduce interest in view of the coming loan. However, many things remain an enigma: some of the conditions for receiving the loan have not been announced and the memorandum on Ukrainian economic policy handed the IMF for confirmation has not yet been made public. However, there are rumors in Verkhovna Rada that the interest rate for the loan will be 16% annually (normal countries get loans with 5-6% annual interest). No one knows how we will return it, and the President says that everything is going to be fine, only that it will take some time. Perhaps a second term?

 

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