INTERNATIONAL FUNDING FOR UKRAINE STILL POSSIBLE THIS YEAR.

With most of their political scandals with luck behind them, Ukraine’s economic policymakers have approached negotiations with international financial institutions with renewed vigor over the last few weeks. Following the approval of a reduction in export tariffs on sunflower seeds to 17 percent, the government and the National Bank of Ukraine (NBU) moved to address one of the key concerns expressed by IMF representatives in the last two rounds of negotiations: the situation in the banking sector. On July 11, the NBU decided to withdraw the operating license from Bank Ukraina, the largest Ukrainian commercial bank. It did so upon the Ukrainian government’s request. Bank Ukraina has been considered a threat to the stability of the country’s banking system for some time. Suffering from chronic insolvency problems brought about by a huge portfolio of nonperforming loans, the bank’s board appealed to the government and parliament to bail out the bank.

Bank Ukraina’s board proposed that the government assume responsibility for the debt that had been incurred to maintain the bank’s liquidity. The government rejected the proposal and put forward an alternative solution involving the issuance of 450 million hryvnyas in state bonds to be later swapped for bank assets. However, after heated debates on July 4 and 12, the Verkhovna Rada twice rejected the plan. With the second rejection of the proposal, the government will be forced to declare the bank bankrupt, assume the liabilities toward the more than 1.7 million local households with deposits in the bank and try to untangle the connections between the bank and the 290,000 firms it serviced.

The recent decisions by the Ukrainian government no doubt signal a major rapprochement in relations with international financial institutions. While Ukraine has been current on its financial obligations over the last eighteen months and managed at the same time to increase its foreign exchange reserves to over US$2 billion, the government realizes that it will have to normalize relations with the IMF, the World Bank and the Paris Club of creditors. The IMF has recently signaled that the situation in Ukraine has improved sufficiently this year to guarantee another look at the possible resumption of funding under the Extended Fund Facility (EFF) as early as September 2001. Meanwhile, since the completion in late July of a mission to Kiev, the World Bank has been considering recommending the disbursement of the first tranche of a US$250 million loan to Ukraine in September. This tranche would be the first part of a three-year US$750 million financing program directed at speeding up institutional reforms. The final approval of the World Bank loan may depend, however, on the IMF decision to resume financing under the EFF. The fund will discuss that issue just a few days before the World Bank Board of Directors meets on September 20 (Reuters, July 26).

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