World Bank approves loans of $949.6 million for Ukraine (09/20/98)

World Bank approves loans of $949.6 million for Ukraine

by Roman Woronowycz
Kyiv Press Bureau

KYIV - The World Bank on September 15 approved four loans for Ukraine worth $949.6 million, giving the country additional financial relief to help stabilize its economy and financial system at a time when both are reeling from the financial breakdown of the Russian economy.

Although much of the money is earmarked for specific projects, at least a portion will be used to help cover the budget deficit and stabilize the banking system in Ukraine. "These are important loans received at a particularly critical time for Ukraine," said Roman Shpek, director of Ukraine's National Agency for Development and European Integration at a press conference at the World Bank's Kyiv headquarters.

However, Mr. Shpek emphasized that none of the money will go to repay investors in Ukrainian treasury bonds that are becoming due. Ukraine is experiencing a hard currency shortage, after having used up hundreds of millions of dollars in foreign currency reserves to prop up the national currency, the hryvnia, in the wake of the collapse of Russia's financial markets.

The agreement between the World Bank and Ukraine, signed in Washington by Ukraine's Ambassador to the United States Yuri Shcherbak and the bank's regional director for Belarus and Ukraine, Paul Siegelbaum, introduces two new programs and extends two others.

In one new program, $300 million has been granted for continued enterprise privatization, specifically for moving Ukraine's grain storage silos and agricultural distribution facilities into the private sector.

The program, called the Enterprise Development Adjustment Loan, is also aimed at restructuring Ukraine's money system, specifically the securities market, as well as directed towards bankruptcy reform, accounting reform and deregulation of business.

The second new program, the Financial Sector Adjustment Loan, also worth $300 million, is dedicated to banking reform, including the development of measures necessary for stability and safety in the banking sector, bank accounting reform, institution of National Bank of Ukraine oversight procedures and the restructuring of the banking system, which includes ferreting out insolvent institutions.

John Hansen, a World Bank economic consultant who was with Mr. Shpek, said the two loans are loosely structured so that they could be used for budgetary and balance of payment support as well. He said Ukraine would receive additional tranches of credit as long as reform programs continue to be implemented in the manner and at the pace agreed upon.

The other two loans, a Coal Sector Adjustment Loan and an Agricultural Sector Adjustment Loan, are continuations of programs previously agreed upon between the bank and Ukraine. Together they are worth approximately $300 million.

Mr. Hansen explained that Ukraine's coal industry has a strong tradition and that he does not believe this is the time to write the industry off. "We feel that there is strong potential to restructure the coal industry and to make it a viable and strong part of the Ukrainian economy," said Mr. Hansen.

He said the resurrection of the coal sector could not proceed without mine closures that would be painful to those involved. "Unfortunately, many of the mines have outlived their usefulness," said the World Bank economic expert.

The World Bank also obtained an additional $23.2 million grant for Ukraine from the World Ecology Fund for a project to withdraw substances harmful to the ozone layer of the atmosphere from production in Ukraine.

A $260 million first tranche of the nearly $1 billion line of credit was due in Ukraine within a day. Future disbursements are to be tied not only to agreed upon performance and deadline requirements, but also to Ukraine fulfilling its commitments to the International Monetary Fund, said Mr. Hansen. Last week that financial institution granted Ukraine more than $2.2 billion in credits in a three-year program.

The World Bank loans are scheduled to be disbursed in full by August 1999.

Although the two sizable loans to Ukraine approved in the last several weeks by the two largest international lending organizations in the world are a solid expression of support by the West for Ukraine's future and its recommitment to a free market system, Mr. Shpek pointed out that Ukraine must now do more than simply show that it understands what needs to be done. "Credits will not improve the situation in the country without the continuation of reform, especially structural reform," said Mr. Shpek.

Nonetheless, the investor influx that Ukraine had expected after the IMF and the World Bank expressed their confidence for Ukraine's economic future may not begin soon because private sector confidence in the newly independent states is at an ebb following the problems in Moscow.

"I understand that any discussion with private investors at this time will not be easy," said Mr. Shpek. "We will do everything possible for normal, transparent relations between business and the government, and do what is possible to help investors. But ultimately it is up to them to decide whether the risk is worth it."

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