IMF approves $2.226 billion loan, releases first tranche to Ukraine (09/13/98)

IMF approves $2.226 billion loan, releases first tranche to Ukraine

by Roman Woronowycz
Kyiv Press Bureau

KYIV - After resolving last-minute concerns, the International Monetary Fund board of directors on September 4 formally approved a $2.226 billion, three-year loan program for Ukraine which is tied to Ukraine maintaining a strict economic reform regime.

Ukraine's Vice-Prime Minister for Economic Reform Serhii Tyhypko said on September 10, after Ukraine received the first tranche of $257 million, that Ukraine would use the money to cover the national budget deficit and replenish foreign currency reserves.

Ukraine's foreign reserves have been severely depleted as the country has tried to prop up its national currency, the hryvnia, which has fallen 18 percent against the U.S. dollar in the aftershocks of the Russian ruble collapse.

The approval for the Extended Fund Facility (EFF), as the loan is called, came only after the IMF board of directors sent its Ukraine mission chief, Mohammed Shadman Valavi, back to Kyiv earlier that week in an unscheduled visit to fine-tune the package and review some of the requirements.

Mr. Valavi's visit was linked to IMF concerns about the government's restructuring of the debt of its Government Domestic Loan Bonds, as well as its obligations before the investment house Merrill Lynch International.

Ukraine has received some $500 million in stand-by loans from the IMF until early this year, when the IMF halted the program because it felt that Ukraine was not moving with sufficient vigor in its economic reform effort. After several failed attempts to receive additional stand-by credits, Kyiv abandoned that strategy and moved to get the long-term EFF.

Just before IMF approved the loan, President Leonid Kuchma had personally stepped into the negotiation process on the EFF with members of the IMF mission, usually the domain of Vice-Prime Minister Serhii Tyhypko and Ukraine's ministries of finance and the economy.

The president had also contacted the heads of state of major players on the IMF executive board, including the U.S., Germany, Canada and Great Britain, personally asking them for their support. All of those countries eventually voted to approve the loan, according to Interfax-Ukraine.

Jacques Chirac, president of France, who is another important board member, had expressed his support for an IMF loan for Ukraine to President Kuchma while on a state visit here on September 2-3, days before approval was given.

Meanwhile, the hryvnia slides

Whether the influx of money will stop the steady if not dramatic slide of the hryvnia is yet to be seen, but the government and the National Bank of Ukraine continue to cooperate in crisis mode.

The same day the IMF approved the EFF, the hryvnia experienced a defacto devaluation as the National Bank of Ukraine allowed Ukraine's national currency to slide below the currency band it had set to assure investors and banks the monetary policy would remain tight.

NBU Chairman Viktor Yuschenko had predicted two weeks ago that if Russia's financial crisis continued and the hryvnia continued to take a beating, the band within which the hryvnia could fluctuate would have to be loosened.

On September 4 the NBU announced that a new currency band had been established, allowing the hryvnia to float between 2.5 hrv and 3.5 hrv to the dollar. Earlier the band had been set at 1.8-2.5 hrv to the dollar.

Ukraine has spent millions in foreign currency trying to keep the hryvnia stable as first the Asian crisis and now the Russian emergency have made it tumble in value. By September 9 Ukraine's foreign currency reserves, which had stood at $2.34 billion in January, had fallen to between $860 million and $890 million (U.S.).

Ukraine's executive branch has also introduced legislation to avert a financial meltdown in Ukraine. On September 7 President Kuchma sent an economic anti-crisis package of 36 bills to the Parliament, asking that it be approved immediately.

Two days later he called a special anti-crisis meeting of top economic officials, including Vice Prime Minister for Economic Reform Tyhypko NBU Chairman Yuschenko, the administration's economic aides, the economy and finance ministers, as well as Internal Affairs Minister Yurii Kravchenko.

The meeting examined those areas of Ukraine's economic and financial growth affected by the latest world financial crisis, along with government anti-crisis measures needed to ensure economic and banking sector stability.

Minister Kravchenko was directed to "ensure strict control over the legitimacy of operations with foreign currency and crediting resources," according to Interfax-Ukraine.

Earlier that day Mr. Yuschenko announced that a presidential decree would be issued within a few days giving government guarantees for depositors' monies held in bank accounts. He explained that Ukraine's banking system remains healthy with the average liquidity of Ukrainian banks rising in August by 154 million hrv to more than 750 million hrv. He also noted that mandatory bank reserves had risen by between 300 million and 400 million hrv.

Next week Ukraine may receive another respite from its financial problems. On September 7 Paul Siegelbaum, the World Bank's director for Ukraine and Belarus, said the international financial organization was looking at a loan for Ukraine that could reach $900 million. The loan is scheduled to be considered by the board of governors sometime next week.

The money, which many financial experts have said will be approved if the IMF loan was extended to Ukraine, would be used in four projects, including work on small and medium business development and financial sector reform.

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