Incentive Advance Funding
The International Monetary Fund has approved its annual Standby Program for Ukraine (until March 28, 2005) for $650 million. These funds will be provided only if necessary. After the Extended Financing Facility Program ended in the fall of 2002, the last trance of which came in September 2001, Ukraine has not received any IMF loans, although negotiations continued. Ukraine’s current debt to the IMF comes to $1.77 billion.
After an IMF meeting on this issue, IMF acting director Anne Krueger said: “Ukraine has achieved an extensive and stable revival of the economy and curbed inflation after the 1998-99 financial crisis. Renewed confidence in macroeconomic stability has encouraged the remonetization of the economy, improved the balance of payments, strengthened international reserves, and considerably improved the economy in general. Recent data suggest that economic activity continues to remain strong this year.”
News of the IMF decision was well-received in Ukraine. Ukraine’s resumed cooperation with the IMF under the Standby Program will enable Ukraine to receive funds from the World Bank and the European Bank for Reconstruction and Development along with funds from other international organizations. Ukrainian bankers believe that the approval of the standby program will send a positive signal to investors and will enhance Ukraine’s investment attractiveness. In their view, this can be compared to an increase in Ukraine’s standing in international rating agencies or investment companies.
Simultaneously, the positive decision of the IMF is no doubt a kind of incentive advance funding for the Ukrainian government. It will be recalled that in the closing rounds of the relevant talks a major condition posed by the IMF was that Ukraine solve its VAT problems. Apparently, the IMF has decided to pretend that this problem has been solved in Ukraine. Meanwhile, Bill No. 4000-1, which was to amend fiscal legislation and VAT laws in particular, has been vetoed, and the introduction of the system of VAT accounts has led to negative forecasts in the business environment. Various unions of entrepreneurs have already voiced their criticism of this system, the main risk being that these accounts may stifle Ukraine’s still fragile economic growth. They are certain that it is a hindrance to put economic growth at risk for the sake of fiscal targets and suggest that the possible losses be calculated in advance, which, in their view, might exceed the additional tax receipts many times over.
The VAT accounts have not been well-received by the American Chamber of Commerce in Ukraine. They have been also sharply criticized by the European Business Association, which represents the interests of over 300 companies based in Ukraine. Its statement reads that the authors of the clause on VAT accounts simply ignored all the critical remarks voiced by the representatives of the business community. The association believes that this clause does not contain effective mechanisms that would prevent the funds of taxpayers from frozen in special accounts.
However, as The Day learned from the National Bank of Ukraine, the IMF has been satisfied with the fact that Ukraine has significantly increased the provisions for VAT repayments in the budget, recognized the current amount of arrears, and issued bonds for debt restructuring. Put simply, the IMF has not turned a blind eye to the existing problems, but only agreed that although the Ukrainian government has not solved all the problems, it is moving in this direction. Yet, judging from the fact that this movement leads to differences between the government and business community over VAT accounts, we are yet to see if this is a forward movement.
