End Note: IMF, UKRAINIAN LEADERS DISCUSS REFORMS xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

UKRAINIAN PREMIER TRADES CABINET POSTS FOR PARLIAMENTARY SUPPORT. Valeriy Pustovoytenko has offered jobs in the executive, including in government and state committees, to deputies from seven caucuses of the Supreme Council, Ukrainian Television reported on 14 October. The price for those posts is the creation of an "intercaucus" majority in the parliament to support the government. "Without fail, we will give jobs in our government structures to those who deserve them," he said. Pustovoytenko's offer follows President Leonid Kuchma's announcement the same day that the government will soon be reshuffled. Kuchma said the new appointments will be made "on a purely professional basis," Interfax reported. Kuchma's spokesman, Oleksandr Maydannyk, told journalists that the president has invited the legislature to make "nonstandard proposals" for cabinet posts. JM


Since Ukraine's recent agreement on a reform program with the IMF, the country has been hit by new economic problems. Some Kyiv-based international financial experts say this is complicating Ukraine's efforts to fulfill the program's aims.

A Ukrainian delegation, including Prime Minister Valeriy Pustovoytenko, Finance Minister Ihor Mityukov, and National Bank Governor Viktor Yushchenko, met with IMF officials in Washington recently. They discussed what must be done to obtain further tranches of a $2.2 billion loan that are attached to the reform program.

An outline of the program is posted on the IMF's web site. It includes steps to ensure progress in stabilization, to create a smaller and more efficient government, to accelerate deregulation and privatization, and to reform the financial sector. Other measures are restructuring key economic sectors, increasing competition, and improving protections for the most vulnerable members of society.

Aleksei Sekarev, an economic adviser with the Ukrainian-European Policy and Legal Advice Center, calls it "a very ambitious program for Ukraine." His research center is funded by the EU. Sekarev says that it will be "very difficult for Ukraine to fulfill many of the conditions." But he says he believes that there is "a readiness on the part of the IMF" to be realistic about how many of the conditions can be met.

Ukraine's program for economic revival underwent drastic modification even as it was supposed to be getting off the ground. By the time the government and the IMF board of directors reached a final agreement on the loan on 4 September, the Russian financial crisis had hit and many of the financial benchmarks written into original plans had become unrealistic.

In a letter to the IMF, the government indicated it would not be able to replenish the Ukrainian National Bank's depleted reserves as earlier promised. The letter also mentioned a new exchange rate band of 2.5-3.5 hryvna to the dollar, effectively devaluing the national currency.

The government also introduced a new set of financial benchmarks, including ones on gross domestic product, consumer price inflation, the state budget deficit, money supply, and foreign currency reserves.

Since then, the economic situation has deteriorated further. At the end of September, the National Bank's foreign reserves stood at $1.08 billion, some $250 million short of the target.

Patricia Bartholomew, an economist at the Kyiv office of Germany's Commerzbank, says she expects more problems ahead. "Ukraine needs to develop a competitive economy, but there has been trouble getting legislation through the parliament." She expresses the view that the situation in Ukraine will "continue to frustrate the IMF."

The parliament has already postponed discussion of the budget until 15 October and is unlikely to approve it. Since July, Ukraine has issued seemingly inconsistent presidential and cabinet decrees, some in line with goals agreed with the IMF, some taking a sideways step, and some directly in opposition.

The clear conflict is between measures toward deregulation and steps that allow for government intervention in the economy, such as protecting Ukrainian-produced goods, writing off tax arrears, and expanding the list of excise exemptions on local goods.

Sekarev of the EU-funded research center speculates that the IMF may be willing to overlook measures that contradict the spirit of IMF policy as long as they do not contradict agreed conditions and as long as most legislation remains consistent with agreed reforms.

IMF officials say that production goals and other targets and deadlines in the government's memorandum to the IMF are flexible.

Patrick Lenain, the IMF's top official in Kyiv, says "we know we have to remain flexible and we have to adjust". He said IMF officials know that "a lot is not going to happen, or it will happen faster, or slower" than planned and new measures may be necessary. Lenain went on to say that if criteria are not complied with, IMF officials will consider waivers.

While quarterly reviews will look at long-term trends, the IMF will also review Ukraine's progress before deciding to release each monthly tranche of the loan. The frequency may be an indicator that the IMF has doubts about Ukraine's ability to keep its promises. Only Russia has disbursements with the same frequency; other IMF country loans are regulated quarterly or even half-yearly.

The IMF money is critical to balancing Ukraine's budget, servicing high-interest government debts, paying for imports, and maintaining the hryvna as a viable currency. Moreover, loans from the World Bank are conditioned on the government keeping to the IMF program, and private lenders and investors rely heavily on the IMF as an indicator of Ukraine's economic prospects.

Commerzbank's Bartholomew expresses the view that "the IMF is in a very difficult position." She says "they do not want to seem too strict, they are trying to get as much reform through as possible without pushing it too far and causing a backlash against reform. But," she says, "they also don't want to be seen as a pushover."

The author is an RFE/RL correspondent based in Kyiv.