1995: THE YEAR IN REVIEW: Aid to Ukraine: the West responds (12/31/95)

1995: THE YEAR IN REVIEW

Aid to Ukraine: the West responds

Banking on President Leonid Kuchma's commitment to reforms, Western donors were particularly generous to Ukraine in 1995, granting it close to $5 billion in aid.

And according to the third annual Development Cooperation Report for Ukraine (DCR) published by the U.N. Office and released in late October, foreign aid to Ukraine will continue to grow, with the focus shifting from humanitarian to technical assistance.

Indeed, as the year drew to a close, Ukraine expected more foreign monies in 1996. Representatives of the World Bank, the International Monetary Fund, the European Bank for Reconstruction and Development, as well as government officials from G-7 countries made pledges to help Ukraine during its time of transition.

The latest agreements were signed by President Kuchma while in London on December 13, with the EBRD pledging $130 million for economic assistance as well as $75 million for the development of the power industry and over $6.5 million as a donation to Ukraine's investment fund.

The president has recently emphasized the need for foreign investment to help Ukraine get on its feet economically.

At the end of 1994, the World Bank agreed to lend Ukraine $500 million in support of the country's transition to a market economy; the loan was the single largest disbursement of Western assistance to Ukraine to date.

The World Bank decision followed the International Monetary Fund's endorsement of President Kuchma's reform initiative. The IMF released $371 million of a systemic transformation facility credit in October 1994; in 1995, it released the second STF credit and began releasing tranches of a stand-by credit worth $1.57 billion. By late December came the promise of a fourth tranche by IMF representatives who traveled to Kyiv, under the condition that Ukraine carries out its policy of economic reforms.

President Kuchma, who just two weeks ago met with John Olding Smee, the director of the IMF's Second European Department, urged the IMF "to look at Ukraine not only from the viewpoint of figures, but in broader terms."

But the IMF, which granted Ukraine its third tranche of the $1.57 billion stand-by loan only at the urging of the United States, told the Ukrainian government that it must be more efficient at fulfilling the IMF program and keeping to commitments outlined in the memorandum of understanding between Ukraine and the IMF.

These commitments include reducing inflation to 1 percent by the end of 1995, keeping the state budget deficit to 3.3 percent of the GDP, as well as requiring the government's substantial withdrawal from agricultural financing, a strict wage policy, cash limits in certain areas, and further increases in public utility charges, housing rents and energy prices to households in order to contain subsidies.

The program also includes implementation of structural reforms, removing administrative controls and providing incentives for enterprises to innovate, enter new markets and reduce costs.

The IMF-inspired program includes privatization through vouchers of about 8,000 medium- and large-scale enterprises, as well as the majority of small-scale enterprises, which had been scheduled to be completed by the end of the year.

Privatization in Ukraine has proceeded at a snail's pace, land reform is basically non-existent, and despite the fact that the Parliament voted to accept the 1995 government program, which kept the budget deficit down to 6 percent, the very next day the lawmakers endorsed a minimum wage that the government would have to finance with additional emissions, causing inflation to soar sky-high.

But newly released figures on privatization paint a more optimistic picture for 1996. By the end of 1995, the State Property Fund projected that 11,500 small enterprises will be privatized, half of the projected goal of 22,450, and small-scale privatization is to be completed by the end of June 1996.

As of December, 3,000 medium- and large-scale enterprises had been privatized, with an established goal of 8,000 by the end of next year.

Although Ukraine was not able to keep inflation down to 1 percent in December (the final figures are not yet in), it was in the single digits in October and November, 9.1 and 7.1 percent, respectively. Despite an increase in September to 14.2 percent, it was low in June, July and August, coming in at 4.8, 5.2 and 4.6 percent, respectively.

Prime Minister Yevhen Marchuk, who was handed the economics portfolio from President Kuchma when he became prime minister in the spring, revamped the economics policy shaped by the president, preferring evolutionary, not revolutionary reforms. He most recently spoke out against launching reforms "at any price," adding that this could cause social tensions among the population. But, he assured Western lending institutions and government officials that the 1996 state budget would provide for a 6 percent deficit of the GDP, keeping within specified limits. He underscored that Ukrainian economic priorities include combating inflation, increasing production, prohibiting unscheduled emissions and repaying debts through National Bank credits, exterior sources and securities issues.

National Bank Governor Viktor Yushchenko expressed confidence that Ukraine would continue to cooperate with the IMF, and, although he acknowledged that Ukraine had problems with privatization, its biggest financial headache was foreign debt repayment.

The IMF was helpful to Ukraine also in agreeing to assist in restructuring Ukraine's huge debt to Russia.

The countries of the G-7 and the European Union also were great supporters of Ukraine in 1995, with the G-7 finally pledging financial aid of $2.3 billion to Ukraine in return for shutting down Chornobyl. Although money was often a sore point in discussions between Ukraine and the G-7 countries (U.S., Canada, Japan, France, Germany, Italy and Great Britain), by the end of the year, Ukraine had received assurances of bilateral and multilateral aid, including EU loans of more than $100 million.

Ukraine's biggest bilateral benefactor was the United States, which has earmarked nearly $300 million in aid for 1996, according to Richard Morningstar, U.S. secretary of state for NIS assistance and special adviser to President Clinton, who visited Ukraine in early December.

Ambassador Morningstar pointed out that Ukraine will be the third largest recipient of U.S. aid in 1996, after Israel and Egypt, and the largest recipient of aid in the former Soviet Union (trading 1995 places with Russia), but he cautioned that if privatization in Ukraine were to slow down, the U.S. would be forced to reduce the volume of aid directed to Ukraine.

"We believe that it is important for reform efforts to continue in Ukraine, and we will do everything possible to help," said Mr. Morningstar.

But, it is not only the U.S. that has extended a helping hand. As President Kuchma traveled abroad throughout the year, he received promises from Western countries such as Germany and Great Britain that their aid to Ukraine would increase.

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