Loan threatened by Ukraine cash crisis

Date: 17/09/1998

By Simon Taylor

PLANS for a new EU loan worth up to 150 million ecu for the former Soviet Republic of Ukraine are hanging in the balance amid concerns that Kiev could breach the terms of a new International Monetary Fund agreement.

EU finance officials had been expected to approve the loan at a meeting next week. But doubts have emerged about Kiev's ability to comply with conditions attached to a fresh IMF aid programme after it was revealed that early loan repayments could take the Ukrainian central bank reserves below the fund's permitted minimum.

Officials said it was unclear whether member states would interpret the problem as another example of Ukraine's poor track record on honouring its international commitments, or approve the loan to help the country avoid a repeat of the currency collapse which has crippled Russia's economy.

The way had looked clear for Union governments to approve the funds following last week's IMF decision to endorse a 1.98- billion-ecu aid scheme for the country, which has seen the value of its currency (the hryvnia) fall by about 30% in the last three weeks.

European Commission sources said that the Union had to wait to see that Kiev was implementing the terms of the agreement before it could sanction new EU money for the republic of 50 million people.

If finance officials decide to approve the technical details of the loan at next week's meeting, it will then be nodded through at a ministerial meeting shortly after that. Officials were hoping that the process could be completed in time for the EU-Ukraine summit in Vienna on 16 October .

Boris Hudyma, Ukrainian ambassador to the EU, told European Voice this week that he hoped the money would reach Kiev by November at the latest.

Commission officials say the cash will be made available in two or three tranches and will have to be repaid over a ten to 15-year period.

As part of the Union's programme of macroeconomic assistance, it can offer financial aid to struggling states by borrowing on the international money markets and lending the funds on. By taking advantage of the EU's 'AAA' credit rating, countries can obtain capital more cheaply than if they borrowed directly from the financial markets.

Aid recipients are subject to very tight restrictions on how the money is used. The conditions are designed to ensure that the assistance fulfils the aim of ensuring financial stability and is not diverted by governments into compensating for short-term economic failings.

Ukraine's economy has been hit hard by its close links with Russia, which accounts for 40% of its foreign trade.

Kiev recently unsettled holders of its treasury bonds by offering to redeem securities at less than market rates despite receiving a 230-million-ecu IMF loan. Financial markets have been thrown into turmoil by political uncertainty over Ukrainian President Leonid Kuchma's commitment to economic reform.