Editor's Note: Times change, but Ukraine's poor finances and inability to reform, do not. This Dec. 15, 1998, article highlights the possibility of default and hrvynia devaluation amid Russia's economic crisis.
Ukraine will not be able to pay its foreign debts on schedule and might have to let the hryvnIa significantly devalue next year unless the International Monetary Fund resumes its lending to the country, Finance Minister Ihor Mityukov acknowledged on Monday.
In an interview with the Ukrainian News agency, Mityukov did his best to put an upbeat spin on the government’s dire financial outlook for 1999, stressing that he expects the IMF to resume lending.
‘I have directed the [Finance Ministry’s] external debt department to draft proposals [to restructure foreign debt], but we are presently working on the premise that the IMF and World Bank programs will be implemented and then there will be no necessity [to delay repayments],’ Mityukov said.
Mityukov was clearly aiming his comments at both the IMF and the Ukrainian parliament, which gave preliminary approval on Friday to a 1999 budget that would torpedo the IMF’s and World Bank’s loan agreements with Ukraine.
Mityukov warned that if the IMF and World Bank don’t resume lending, it will ‘destabilize’ Ukraine’s economy.
‘I think the Finance Ministry and Ukraine as a whole do not wish to see, because that might require strict changes to the currency policy,’ Mityukov said. ‘We will be forced to increase mandatory sale [of exporters’ foreign-currency proceeds] and introduce additional restrictions on the currency market in order to mobilize foreign currency.’
‘It might be accompanied with significant devaluation of the hryvna,’ Mityukov added.
The IMF and World Bank announced on Dec. 7 that they had suspended lending to Ukraine due mainly to the government’s poor tax collection and sluggish reforms.
The IMF’s representative in Kyiv said a decision on resuming IMF lending would not be made until February at the soonest and would depend primarily on whether parliament adopts a ‘realistic’ budget.
Reuters, summarizing the views of Kyiv-based financial analysts, said on Friday that the IMF’s decision to suspend its loans ‘does not necessarily spell gloom and doom’ and ‘could spur approval of a realistic budget.’
‘If … the IMF further delays its tranches beyond January, Ukraine will have a little difficulty keeping the currency from sliding,’ Reuters quoted Tomas Fiala, director of Wood & Company’s Kyiv office, as saying.
The Economist was somewhat less understated.
‘If and when [currency-market] controls are lifted, the hryvna will plunge again. It will do so even more precipitously if, as President Leonid Kuchma hints, his government starts printing money,’ the magazine wrote in its current edition.
‘Ukraine’s only hope of avoiding default or further rescheduling is to persuade the IMF to let it spend its reserves on debt repayments,’ the magazine added.
Under the three-year, $2.2 billion loan agreement the IMF reached with the Ukrainian government in September, the IMF’s loans were targeted at replenishing the National Bank’s reserves. However, the IMF insisted that Ukraine not use the money to repay government bonds, demanding the government ‘voluntarily’ restructure most of them.
If Ukraine were in good standing with the IMF, it might be able to cover its foreign debts by selling new bonds.
The World Bank’s loans are earmarked for specific reform projects and don’t directly affect the government’s ability to pay off its bonds.
The Economist put Ukraine’s foreign-debt obligations for 1999 at $1.8 billion; Wood & Company estimated them at $1.5 billion.
In any case, the National Bank’s hard-currency reserves of $833 million as of Oct. 31 are not nearly enough.
Bank Austria Creditanstalt’s Kyiv treasurer William Dahmer told Reuters that the National Bank may have invested some of that $833 million in Russian treasury bills.
Meanwhile, Kuchma continued his calls for an end to the exchange-rate corridor and relaxation of other controls on trading of the hryvnIa.
‘My personal conviction is that, in order to remove all limits on access to foreign currency – which leads to abuses – we do actually need to [let the currency float freely],’ Kuchma said on Dec. 9.
After the financial meltdown in Russia, Ukraine’s National Bank let the hryvna devalue by more than 50 percent while instituting strict trading controls to prevent it from sliding further.
But exporters and others have been chafing under the restrictions, and talk of easing the controls has become louder in official circles in recent weeks.
Many economists agree that the trade controls need to be lifted to ease pressure on the real economy, but they are worried by Kuchma’s recent argument that printing a limited amount of money wouldn’t necessarily spur inflation.
‘Widening the corridor, eliminating administrative measures and maintaining fairly tight monetary policy might make sense,’ David Snelbecker, a macroeconomic policy adviser to the government at the Harvard Institute for International Development, told Reuters. ‘However, eliminating the corridor and loosening monetary policy would likely be disastrous, leading to a collapse in the exchange rate and hyperinflation.’
Snelbecker added that even if the IMF does resume funding, Ukraine would still be a long way from out of the woods.
‘Even if they get [support], they are in a tough situation ultimately because reforms are going very slowly,’ Snelbecker said. ‘In a sense this is all just rearranging the deck chairs on the Titanic, when what this country really needs is comprehensive reform.’
