GOVERNMENT FINANCIAL ILLUSIONS make Ukraine a country of lost opportunities

Last week an IMF mission started work in Kyiv. The agenda of the negotiations includes at least two groups of problems such as results of fulfilling the government memorandum for receiving its sixth stand-by credit installment and opportunities to gradually convert from stand-by to EFF credit.

There were many times in the three year history of relations with the IMF, when financial support of President Kuchma seemed to have been suspended. The forced pause in financial support caused arrears in wages and other budget payments in 1996- 97.

According to the well-known economist Jeffrey Sacks, the country, which managed to increase its international debt from zero to 50% of GDP in six years, should immediately reconsider its economic policy and loan policy in particular. He thinks it would be ideal if Ukraine could live within its means or attract direct foreign investment. To some degree the Finance Ministry understood the danger of debts but interpreted this in a Ukrainian way.

The absence of cheap IMF and EBRD loans last year led to dependence upon unpredictable nonresidents,and this year the Finance Ministry has decided to reduce the number of foreign domestic bondholders. However, the panic of nonresidents is not the only motive for the policy change. The NBU has been the main buyer of domestic bonds on the primary market since November 1997. According to domestic bonds market operators, the NBU purchased no less than 80% of the domestic bonds auctioned in order to finance payment of state obligations, and this fosters devaluation of the hryvnia due to money supply growth. Thus, the Finance Ministry decided to reduce sales volume at primary auctions.

Creation of a special fund to buy domestic bonds on the secondary market is another Finance Ministry initiative, which also aims to "turn an expensive domestic debt into a cheaper foreign debt". According to the Finance Minister Mityukov, "the fund will not be created at the expense of budget income, we will create it, if our foreign loan programs work out."

According to unofficial sources, the Finance Ministry is planing to raise about Hr 1.160 billion on foreign markets in February-March 1998. There are also plans to issue Hr 200 million of domestic bonds. Ukraine will take out a foreign loan denominated in Deutschmarks in cooperation with America's Merrill Lynch and Germany's Commerzbank. Mityukov refused to explain loan conditions and its approximate volume by saying "this will be either a fidutsiary credit or syndicated one. In other words, the Ukrainian government is no different from any private businessman, whose authority depends on what he owns.

However, the government needs to attract a $50 million installment from the IMF in order to fulfill this plan. It is thought that regulary renewed installments are a kind of insurance for other creditors from the politically unstable situation in the country.

The IMF has the great advantage over other investors in receiving the most reliable information about the country. The Memorandum on government economic policy for 1997-98 is not an easy document to access, so we cannot be sure, but the one valid in 1996 stipulated the IMF's right to information access. "Launching and monitoring" of the program obligated the government to:

1. turn to IMF for advice in on correcting its economic policy;

2. submit weekly information on budget execution and moreover, to grant IMF observers the right to be present at the Finance Ministry sessions;

3. turn to the IMF when coordinating fiscal and monetary policies;

4. grant the right to be present at NBU meetings;

5. assist the IMF in conducting the fundamental verification on the fulfilment of memorandum conditions, ect.

However, in spite of strict memorandum conditions, traditional according to the international Agenda group, which includes leading experts from many of the developed countries, traditional IMF stabilization programs have one serious weak point - they create obstacles, which can easily be avoided by achieving long term economic growth. At the same time they do not protect against irrational expenditure. In the Ukrainian case, despite two billion dollars aid, economic reforms have failed to be launched in the real sector.

As earlier, government intentions to broaden the program for cooperation with the IMF do not answer questions of the strategy of economic reform. Postponing the terms for fulfulling obligations does not put forth any guarantee that the present regime controls the situation and is able to actually do what it promises.

And all the same, negotiations on new EEF loan program began on February 6. Last August the IMF refused to open an EFF program in Ukraine. Commenting on the prespective of receiving the new loan, Presidential aide Valery Lytvytsky said in an interview with the Ukrainian News Agency: "EFF conditions will surely stipulate serious structural reforms, just as last year, when the transition failed to succeed. I am not trying to compare the government back then and the government today, but I think that there is a chance to transition to the new credit program in the first half of 1998."

Other experts are not so optimistic: the indefinite political and economic situation in the country prevents them from predicting the situation.