IMF tells Ukraine it will not issue credits until exporters receive refunds of taxes (03/03/02)

IMF tells Ukraine it will not issue credits until exporters receive refunds of taxes

by Roman Woronowycz
Kyiv Press Bureau

KYIV - The International Monetary Fund threw Ukraine a financial curve ball on February 22 when it told Kyiv that it must return more than $1 billion in value-added taxes (VAT) collected from Ukrainian exporters before the country qualifies for more financial support. Until Ukraine complies, the financial organization refused to issue more credits.

The decision by the IMF executive board, which came after three days of meetings in Washington with a Ukrainian delegation led by Minister of the Economy Vasyl Rohovyi, led some Ukrainian officials to suggest that it may be time to curtail relations with the international financial organization.

President Leonid Kuchma's chief economic advisor, Anatolii Halchynskyi, said on February 25 that because Ukraine has had a positive balance of payments for three years running, it should consider not taking IMF loans.

"It may be time to change our relations [with the IMF]," said Mr. Halchynskyi.

During a press conference in Kyiv, Mr. Rohovyi said he was not sure that was the best possible alternative. He expressed his opinion that it was probably better to complete the extended fund facility (EFF) program with the IMF, which is scheduled to end in September of this year, and then move to a non-credit consultative arrangement, which would send the proper signals to potential investors.

However, he said he was bothered by the IMF decision because it disregards the economic accomplishments that have taken place within the Ukrainian economy over the last two years and suggests to potential investors and commercial lenders that Ukraine's economy remains unstable.

Many bankers and investors, governmental and commercial alike, look to decisions by the IMF, which closely scrutinizes the financial conditions in a country before extending credit, as a guideline for their own financial and investment policies towards the country.

"We didn't travel to Washington this time just to get the scheduled tranche. For us the most important thing is not the sum of money or when we get it, but the confirmation that reforms are proceeding in Ukraine," said Mr. Rohovyi.

Ukraine has had trouble receiving IMF credits since it agreed to take part in the EFF program in 1998, mostly because it has failed at times to fulfill various requirements, but this may be the biggest headache yet.

Now the IMF is demanding that Ukraine return close to 6 billion hrv of VAT revenues to certain exporters, which the IMF said were improperly double-taxed because they also paid import taxes to the country where their commodities went. The IMF wants 700 million hrv (about $130 million) returned by March and another 650 million hrv repaid by the end of June. A total of 2.1 billion hrv (some $400 million) should be in the hands of wronged businessmen by the end of the year, according to the IMF.

Mr. Rohovyi said the windfall for the businessmen would break Kyiv's 2002 budget, as well as its economy, which grew in 2001 at a 9 percent clip and is expected to expand by another 6 percent this year.

The minister of the economy said he saw much irony in the fact that the IMF was suggesting the money be paid back in part by running a fiscal deficit - a move that could result in the restart of inflation, which was held to 6.1 percent in 2001.

"Earlier the IMF pressed us to balance the budget, now they have told us that we should run a deficit in order to repay the VAT," Mr. Rohovyi noted. "We are not going to risk what we built with so much hard work since 1998."

According to a government official in the Ministry of the Economy, a still larger problem for Ukraine, however, is to determine who should get the returns. With corruption widespread in business and government circles in Ukraine, no one denies that many of the documents based upon which the IMF determined its figure are forgeries. These businesses could now receive a second windfall - the first being the fact they didn't initially pay the tax.

There are also many instances, including more cases of simple fraud, where the documents are all in order, although nothing was ever exported. Technically, the holders of this paperwork also would be eligible to receive money from the Ukrainian government, the ministry official continued.

In addition, the government must determine the amounts each valid exporter should receive in its refund. Due to various changes to the law on value-added taxes (there were 24 changes just last year, according to the newspaper Den), many commercial entities do not pay the full 20 percent, with some giving up no more than 6 percent.

Ukraine's EFF program is for $2.4 billion, of which it has received $1.48 million. Mr. Rohovyi said he hopes that after further negotiations Ukraine will receive approval for the next tranche of IMF funds in March.

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