Now that the Extended Funding Facility program has been completed, with the International Monetary Fund having refused to grant the last loan as the final curtain went down, a question arises as to the terms on which Ukraine should now proceed to cooperate with this international organization. As for the World Bank, another creditor that is also of great importance for Ukraine, the policy is more clear- cut and in 2002-2003 is determined by Program System Loans that total $750 million ($250 million each). The first of three program system loans (PSL 1) was granted Ukraine a year ago, with PSL 2 being the next. Gregory Jedrzejczak, head of the World Bank representative office in Ukraine, believes Ukraine has a “technical opportunity” to receive another $250 million by the end of the current year. But, according to him, we are dealing with an absolutely new situation at the moment. On one hand, the cooperation program with the IMF is not working, and on the other, the fund confesses that Ukraine has satisfied the macroeconomic conditions. For this reason the World Bank has not yet decided whether a signal from the IMF is enough for the PSL 2 application to be approved. The final decision will probably be made in the course of the annual meeting of IMF and World Bank directors slated to take place at the end of October in Washington, with a Ukrainian delegation also taking part.
This month has seen the tenth anniversary of cooperation between the World Bank and Ukraine. During this period the former has approved providing 24 loans and four grants of the Global Ecology Fund to Ukraine, totaling almost $3.4 billion, as well as carrying out one guarantee transaction of $100 million on the Sea Launch project. The following sectors of the nation’s economy have received the most fundamental financial support: the power industry ($677 million), private sector development ($640 million), carrying out economic policy ($570 million), and agriculture ($332 million). The World Bank has recently set about preparing the new strategy of helping Ukraine in 2004 – 2006 fiscal years. Mr. Jedrzejczak considers the possibility of Ukraine shifting to non-credit relations with the International Monetary Fund to have no effect on the World Bank credit policy. The point is that the IMF’s estimation of Ukraine’s macroeconomic situation is still important for the bank, no matter whether “there will or won’t be any money” involved in the relationship with the fund.
COMMENTARY
Cooperation of the two has past the point of ten years. In your opinion, what pluses and minuses of such partnership have shown up during this time?
Valery LYTVYTSKY, top advisor to the National Bank of Ukraine governor:
In general, I regard the ten year cooperation of Ukraine with the World Bank and IMF as very useful. It has been a good stage of effecting our reforms. But for cooperation with the World Bank, Ukraine would not have been able to accomplish the structural part of the Extended Funding Facility (EFF) carried out jointly with the IMF. I therefore believe that both the IMF and World Bank (closely interconnected with each other) should rightfully share credit for the success of the EFF program, which contributed greatly to Ukraine’s renewed economic growth of 2000. Indeed, progress has been accompanied by some lost opportunities from both sides. For had we cooperated with the two institutions more intensively, the economic growth would have started earlier, which is especially true for the structural reform sphere, i.e., for tax, budget, and banking reforms. We still have some reserves left in those sectors, which shows in the present state of the budget process. Both the World Bank and we should have been smarter in the case of the Bank Ukrayina and should not have delayed the solution of the problem. On the other hand, had we not acted on our authority in making a number of decisions connected with monetary and exchange-rate policy, the upturn would have been much more modest. This fact indicates that we should rely more readily on our own product when carrying out economic programs, as well as carry our point more resolutely. In the structural reforms sphere we haven’t, unfortunately, managed to hold our position on a number of administrative reforms, which, in my opinion, resulted in the problem still being on the agenda. That direction of cooperation with the World Bank has not been developing dynamically enough, with a lot of unsolved problems still remaining. I suppose Ukraine will not shift to a noncredit relationship with the IMF. For the Fund Facility not only replenishes our exchange reserves, but, more importantly, also provides our potential investors with a trustworthy acknowledgment of our government and Central Bank being committed to speeding up reforms.
Yury PAKHOMOV, director of the Academy of Sciences Institute of World Economy and International Relations:
Watching the World Bank’s policy is of great interest for me, because, strange as it seems, the Bank appeared to be the only international organization to question from the very beginning our capability of applying the disastrous reform model we had to comply with until 1999. Already in the early 1990s James Wolfenson studied the effect IMF recipes were having on transition and developing economies. The receipt of loans requires exploding liberalization, preventing the state from regulating, and overvaluing the national currency. A three-year project on studying the reform and transformation problems in developing countries was later carried out under the aegis of the World Bank, with 94 states covered. The analysis of the project showed that as a rule only those countries following their own well thought-out policy concerning a country’s specificity would achieve success – which by no means denies the reasonableness of certain recipes used by the IMF. Then the World Bank itself conducted research which put an end to the destructive reforms of the IMF type, the latter having culminated in the crisis of 1997-98. The limited nature and ignorance of the competitive environment priority was demonstrated as specifics of those reforms’ schemes in the report given at the US Congressional University. Reflecting on the more than conspicuous discrepancies in the two institutions’ positions led me to conclude that the IMF and World Bank pursue different concerns of world capital. Being a servant of transnational companies trying to distribute its products, the IMF is interested in full import markets, which results in overvalued national currencies, unfounded liberalization, etc. On the contrary, the World Bank is concerned with economic development, carrying out projects meant for developing national economies. In fact, this implicit motivation proved to be our salvation.
Oleksandr PASKHAVER, president of the Economic Development Center:
Having always welcomed the presence of international financial institutions in Ukraine, I sometimes feel bewildered when reading those organizations being blamed for the ruination of Ukraine. International organizations have a developed bureaucratic machinery, and bureaucrats all over the world are known to do everything the wrong way. In that sense one can point to a plethora of mistakes made by the World Bank machinery concerning the Eastern Europe states that can be criticized. But this is not the point, for, being a person involved with implementing reforms in Ukraine for ten years, I can confirm that the World Bank has greatly stimulated the changes in our country. It is Ukraine, with its minor changes energy, where the World Bank has contributed immensely to the creation of a market economy, the role of the former being probably even greater here than in any other Western European country. Saying this, I am aware of the major mistakes made by international organizations, including the World Bank, when dealing with the postsocialist states. These mistakes are first of all connected with underestimating the social conditions of such a transformation. I would say that the international experts considered those countries’ economy as a technical system. That was a real blunder of the international organizations, which affected us badly. Yet, I am afraid, but for those organizations, including the World Bank, having been present here in Ukraine, we would now have an economy of the Belarusian type. Which might satisfy some, but not me.
Ihor MITIUKOV, director general of the Financial Policy Institute and former minister of finance:
The World Bank remains currently the greatest and most advantageous creditor for Ukraine. The credits extended by it are of the longest terms (15-17 years) and offer the lowest interest rate. The World Bank specializes in cooperating with governments, providing funds for covering budgeted deficits, which has enabled the Cabinet of Ministers to sustain the appropriate expenditures level, with social programs included. Thanks to the World Bank funds we have managed to get positive results in a number of economic sectors. As for the failings, on the other hand, the 1995-1996 bank projects aimed at reform in the energy sector proved to be ineffective. Only later, within the period of 1999-2000, could we make essential progress in reforming the agricultural sector, though the more serious reforms are yet to come. That is also true of the World Bank projects on administrative reform, for they were not worked through professionally enough. It is extremely important for Ukraine to maintain the level of cooperation with the World Bank already achieved.
