INTERVIEW: Viktor Yuschenko on Ukraine's economic state (10/18/98)

INTERVIEW: Viktor Yuschenko on Ukraine's economic state

by Yaro Bihun
Special to The Ukrainian Weekly

WASHINGTON - During the October 4-8 visit to Washington by Ukrainian Prime Minister Valerii Pustovoitenko for talks with officials of the International Monetary Fund, the World Bank and the U.S. government, one of the important members of his high-level delegation, National Bank of Ukraine Chairman Viktor Yuschenko, gave an interview to The Ukrainian Weekly's special correspondent Yaro Bihun, in which he discussed the Washington talks, Ukraine's economic relationship with Russia, the pressure on the hryvnia and the problems caused by the unregulated flow of short-term capital, which some say is at the root of the current international financial crisis.

The following are excerpts from that interview, translated from the Ukrainian.

Q: Could you give us any details about your talks with the International Monetary Fund and World Bank?

A: The most important question that was discussed concerned the level at which Ukraine was adhering to the parameters of the [IMF's] EFF - Extended Fund Facility - program. And it may be worth noting that there were no serious problems in confirming the high-level of its adherence to the program, that is, as of October 1.

In addition, the World Bank last month launched new initiatives in providing four new credit programs as a sub-project to the EFF. This was the second part of the negotiations, which took place with the World Bank. We might also say that the Ukrainian position and actions were very well received.

All in all, one could conclude that Ukraine now has a unique opportunity to separate itself from Russian problems, from the old stereotypes of dominance and subservience or dependence on the situation in Russia and its economic policy.

Also, it is worthwhile considering that in order to have the situation completely under control by the end of the year, Ukraine must develop a series of additional decisive tactical steps in mobilizing its budgetary and fiscal resources. There need to be certain changes in our trade and monetary policies. As for the latter, however, today one can say that Ukraine has the opportunity to maintain a strong and stable currency. The recent devaluation of the hryvnia, we feel, was an adequate reaction to developments in Russia. Any further reaction would be unnecessary, and we need not look for reasons to initiate a policy of rapid and sizable devaluation in the future.

I think that, in general, one can conclude - as our friends and creditors confirm - that there is a meaningful difference in Ukraine's approach to the developments and problems in Russia. In my opinion, Ukraine today sees many things differently and more clearly, including our trade dependency, which developed over many years - possibly merely out of tradition - and brought about a complex monetary dependency; today it is undergoing serious revision.

Our trade policy must be rational. We must keep this in mind, especially in the closing months of this year when there will be changes made, especially in our trade policy. I think that Ukraine has learned its lesson about the effects of this irrational trade policy, which, we think, will be minimized by the end of the year.

Q: The hryvnia today was nearing the upper limit of its new exchange corridor. Will the current corridor be maintained?

A: We believe that the actions we have discussed with the World Bank and the International Monetary Fund, as well as our domestic program for the remainder of the year, will allow us to keep the situation under control. Although a more complete answer should deal with how Ukraine will react to the causes of the devaluation of the hryvnia, which is, by itself like any other currency, stable by nature. The causes of currency instability are found in the underlying economy, the budget and trade policy. We can talk about the stability of the Ukrainian currency to the extent Ukraine can effectively alter these root causes.

Taking into account the fact that the hryvnia has borne the brunt of our unbalanced trade policy and the panic demand for it as a result of the crisis in Russia, we can state that our reaction was adequate, and that any further reaction is unnecessary.

In the meantime, the hryvnia remains under pressure, of course. We have taken special steps to regulate capital flows and currency exchange mechanisms, and we hope that in the near future this will placate and balance the market.

Q: There is a debate currently under way at the IMF, in the United States and elsewhere in the world about the effects of the free and rapid flow in and out of countries of short-term capital, which is now seen as one of the reasons of the current financial crisis. How does Ukraine view this problem?

A: This is an important factor, because quick flows of short-term funds create immense regulatory problems, which ultimately exerts pressures on the budget. And what happened in Ukraine since August-September of last year is an example of how short-term capital entered Ukraine very quickly, and left just as quickly.

I would point out that in 1997 Ukraine placed almost all foreign capital resources it received into the currency reserves of the National Bank. And when the outflow of this capital began in 1997, Ukraine used this reserve to service the capital outflow. This lessened by a factor of three the effect of capital flight on Ukraine as compared to Russia.

This has been a lesson not only for Ukraine but for most of the East European and other transitory economies - that in considering covering budget deficits with borrowed capital one must keep two very important points in mind. First, is it worth covering large budget deficits with short-term loans? The answer, of course, is "No." We would rather use medium- or long-term loans for this. Second, what currency exchange policy should we adhere to during this period. We are convinced that it should be the policy Ukraine followed last year, when all capital inflows were used to build up its National Bank reserves and not to prop up the value of our national currency. And when the problem of capital flight arose, we relatively easily serviced this withdrawal, using our reserves.

It's very important to remember that if our policy last year was to prop up the exchange rate of the hryvnia, we would be in the same situation Russia finds itself today.

In these two important lessons, Ukraine, I think, does not appear in a negative light; it has incorporated them into its future policy.

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