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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

This Hot Winter Starts in November

10 November, 1998 - 00:00

The IMF mission's trip to Ukraine prior to the next financial year
invariably becomes a major event for official Kyiv. Last week was no exception
as almost every development was in some or other way connected with the
IMF visit.

The mission started work on October 27 and finished on November 6. Part
of the program is dedicated to Ukraine's progress in implementing the October
EFF loan, the government's anti-crisis measures, and NBU's policy. The
reader might recall that the IMF board agreed on another tranche worth
$78 million to Ukraine on October 29, and the Cabinet expects to receive
two more such tranches before year's end. In fact, the main round of IMF-Ukrainian
talks held this week was to determine how much the Ukrainian government's
stated solvency and expert findings would tally.

About Ukraine's accomplishments, they found that our performance was
not bad in meeting fixed commitments in terms of privatization and financial
market stabilization scope during the in terms of major macroeconomic indices.
(Valery Lytvytsky says that "the budget deficit and NBU currency reserve
indices have been implemented, and that of the monetary base carried out
in excess of Hr 100 million.")

Things still to be done are fewer in number than what we have already
accomplished. Still, a reliable Cabinet source informed The Day
that precisely these indices still to be implemented threaten further IMF-Ukrainian
cooperation. In fact, the latter is very likely to be severed and remain
inactive until mid-January-February 1999. IMF is primarily concerned about
Ukrainian fiscal policy; the mission experts believe nothing noteworthy
has been accomplished here. The Ukrainian government has not curtailed
national budget expenditures and continues to live beyond its means. The
next year's draft budget program has been found lacking in many respects,
adjudged as totally unrealistic in terms of budget income items. IMF's
attitude to the problem is rather uncomplicated: either the Cabinet curtails
its spending, provided it cannot effectively collects taxes, or secures
budget revenue, provided there is nothing it can do to change existing
government spendthrift programs.

Of course, the IMF mission paid special attention to administrative
reform, focusing on several problems, among them cutting top-level bureaucratic
apparatus payroll and ineffective state administration as such. The IMF
is dissatisfied with the Ukrainian government being unable not only to
determine who is responsible for what within its own structures, but also
why it is actively involved in activities incompatible with those inherent
in central executive authorities (e.g., oil and lubricant supplies in the
countryside, squeezing out debts, launching tractor output, etc.). Remarkably,
whatever direction this government takes produces about the same effect:
nil. Evidence of this is found, among other things, in the material-technological
supplies to the agrarian sector which, early this year, stipulated making
up for such arrears by supplying grain after the harvest, approximately
5.3 million tons. In reality, it was one million tons. Need we comment?
I think not. And the same is true of what is being called as "technical
discrepancies that can be easily corrected after final checkups." Yeah,
right.

Despite the official version, spread by all the government-controlled
media, saying that this IMF mission did not broach the subject of a Ukrainian
emission, it actually did; the IMF has always taken a resolute stand against
emission and the mission emphasized it this time as well. Our same highly
reliable source was very dubious of the current Cabinet's ability to push
through changes in the NBU-imposed domestic government bond purchase ceiling.
Proceeding from this forecast, the financial situation at the turn of 1999
promises to be very difficult. The trouble is that to keep 1998 budget
deficit at 2.8% of GDP the Cabinet will have to scrape up an additional
Hr 900 million and restructure domestic liabilities toward the National
and commercial banks, currently totaling Hr 600 million. In other words,
the government will have to find Hr 1.2 billion on top of everything else.
Here one ought to remember about some $40 million worth of debt to Turkmenistan,
which the IMF "missionaries" say is not likely to be deferred, considering
that country's sorry financial situation.

As it is, the Cabinet plans to get the Hr 900 million by instituting
as of October 1 a new VAT and excise accrual method, to yield Hr 200-250
million, bettering VAT and excise administration (Hr 100 million), shortening
the lists of critical import goods (some Hr 30-50 mil.), innovation and
road construction/maintenance funds (about Hr 30 mil.). The remaining Hr
400 mil. is expected to be collected by the Finance Ministry by reducing
arrears on payments to the budget. Considering that all the above additional
finance sources are very hard to use, the Cabinet relied primarily on NBU
emission resources and expected the IMF to allow it to carry out an additional
emission in November-December by selling Hr 300-500 mil. worth of bonds
to the National Bank. Whether or not the Finance Ministry will redeem arrears
on such bonds to people and businesses will depend on whether NBU makes
this emission, and whether some budget expenses will be financed (since
tax returns are chronically in the red). A number of other factors could
be cited.

In a word, the end of 1998 is expected to be hot in Ukraine. Wholesale
inflation reached 10% already in October. This month the retail market
is expected to feel the impact also. Add here the accelerated rate of monetary
stock turnover, from 7.9 to 10.3 times, which is tantamount to turning
on the money printing presses. As of late October, this reached Hr 190
mil. NBU unofficial sources say that in the fourth quarter, as a result
of the September hryvnia drop, the government could have received Hr 300-500
mil. and up to Hr 700 mil via the monetary multiplier. Regardless of whether
the Cabinet will get this money as tax payments, the amount constitute
tangible inflation and, of course, devaluation of the hryvnia. These are
far from happy prospects for Ukrainians preparing to welcome the New Year,
and the latter does not promise to be happy, all things considered, because
starting in 1999 Ukraine will have to pay off the first IMF loans received
three years ago.

Considering IMF tactics in Russia and other post-Soviet countries, the
main criteria in giving loans is increasingly often a given country's ability
to tackle its problems on its own. In other words, the nearest prospects
of cooperation with the IMF can be best summed up by whether Ukraine will
live through the coming hot winter without collapsing. If it does, there
will be hopes for further cooperation. If it doesn't, it will be the funeral.

Incidentally, given the present "format" of Ukrainian-IMF relationships,
the Cabinet resorted to disinformation, concerning, among other things,
NBU reserves when a certain amount was quoted officially, with its real
liquidity value set at not more than 30%, or when official sources pointed
to the Treasury's restructuring or implementation of commitments with regard
to municipal expenses. This disinformation proved totally useless.

 

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