For more information, see Ukraine and the IMF

The following item is a Letter of Intent of the government of Ukraine, which describes the policies that Ukraine intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Ukraine, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

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August 26, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

1.  Since the second review in May 1999, substantial progress has been made in stabilization and in structural reform, despite some deviations from the program. In close cooperation with the Fund staff, we have taken a number of measures to keep the program on track, despite a difficult political situation in the run-up to the presidential election at end-October. Some of these measures have already been, or will be, implemented as prior conditions for the current review (Tables 1 and 2). A number of performance criteria for end-August and end-September have been modified as described below, to take account of recent developments. Indicative financial targets for October and November and performance criteria for end-December 1999 have been established (Table 3).

2.  Macroeconomic performance in 1999 has been stronger than anticipated under the program. There are indications that the output decline is slowing down, inflation has fallen more quickly than expected, international reserves have continued to strengthen relative to the program, and progress has been made with structural reforms. While output performance remains weak--real GDP is estimated to have contracted by 3 percent in the first half of 1999 compared with 4 percent in the program--there are encouraging signs economic growth has resumed in parts of Ukraine. Inflation amounted to 8.6 percent during the first six months of 1999, compared to 13.6 percent envisaged under the program, partly reflecting the delayed implementation of planned increases in communal tariffs. As of end-July 1999, the gross international reserve position of the NBU was some $100 million higher than expected under the program at the time of the second review. We successfully restructured the bonds placed through ING in early August. Although the roll-over of maturing obligations by the ING bondholders was smaller than anticipated, the positive response to the offer to convert the Merrill Lynch notes has ensured that the private sector will continue to maintain a significant involvement in Ukraine. Preliminary data indicate that all end-July performance criteria have been met.

3.  Credit policy of the NBU was tighter than envisaged under the program. However, as the NBU continued to make net purchases of foreign exchange in the interbank market, base money rose by about 21 percent during the period January-July, exceeding the program target of 15 percent. So far there are no signs that the faster than expected increase in base money has had any impact on inflation. Indeed, there are indications that demand for hryvnia might have increased. The NBU tightened monetary policy in response to the exchange rate pressures at the end of July and early August, but refrained from selling foreign exchange to stabilize the rate. While the exchange rate has now stabilized, the government and the NBU, in recognition of the urgent need for further strengthening of the NBU's international reserves position, propose that the program targets for the accumulation of net international reserves be increased to take account of some of the over-performance achieved in the months of April-July. The NBU will continue to monitor closely domestic liquidity conditions and, to the extent possible, absorb excess liquidity through the net placement of certificates of deposits so as to minimize pressures on prices and the exchange rate.

4.  As envisaged in the program, the overall cash deficit of the government was 1.8 percent of GDP in the first six months of 1999, compared with 5.2 percent in the same period in 1998. This significant adjustment has largely been achieved through sharp cuts in expenditures. The government has also made a serious effort to improve cash revenue performance, but despite progress in this area, unearmarked state cash revenue collections fell short of program targets. This shortfall was largely offset by lower-than-anticipated interest payments in June due to a delay in the repayment to the ING bondholders and, to a lesser extent, by cuts in other cash expenditures.

5.  Fiscal developments have been broadly in line with the program, despite some slippages. However, while the overall consolidated fiscal deficit for 1999 is on track, with strong performance at the regional level, the state budget is under pressure despite the stronger revenue outlook for the second half of 1999. In addition to the revenue shortfall experienced already, revenue performance is likely to be adversely affected by a number of recent decisions, and additional measures will need to be taken to keep the 1999 fiscal program on track. The government and parliament reduced excise taxes and import duties on petroleum products and extended the period of payment of excise taxes and VAT for these products partly to offset recent disruptions in the petroleum market. Also, tax exemptions were granted to some sectors (including for construction and metallurgy), the minimum pension benefit was increased, and several free economic zones were created (although the fiscal impact of these will not be felt until 2000).

6.  However, adoption of new fiscal measures to correct for these slippages is extremely difficult at this time, because the parliamentary situation does not permit the introduction of new revenue measures prior to the presidential elections in October. In consultation with the Fund staff, we have identified further expenditure cuts, amounting to Hrv 1.0 billion (nearly 0.8 percent of GDP). The government is also intensifying efforts to collect tax arrears and deferrals and strengthen tax administration. In addition, the implementation in July of new revenue measures, as envisaged in the second review, especially the 2 percent import surcharge, increases in user fees, as well as the earlier reduction in the list of critical imports, has already led to a significant strengthening of cash revenues. Furthermore, the government is to rescind on September 1 the Cabinet of Ministers' resolution that provides for the issue of promissory notes by local government, and existing balances are to be eliminated by end-December as originally envisaged. To limit reliance on direct financing from the NBU, the government intends to offer treasury bills with short-term maturity at the regular auction.

7.  To allow sufficient time for the new measures to take effect, we request a modification of the performance criterion for end-September on unearmarked cash revenue, and the performance criteria for August and September on the deficit of the consolidated budget, budgetary arrears, and the net domestic assets of the NBU. In light of the measures taken to correct the fiscal slippage, we also request a waiver for the nonobservance of the performance criterion on unearmarked state cash revenue for end-June.

8.  We have reached agreement with ING Barings on the refinancing of the $163 million payment that fell due on June 9. Under the agreement, the creditors agreed to invest $74 million in Dm Eurobonds with a maturity due in February 2001. In addition, private creditors holding $242 million in notes placed by Merrill Lynch that were due to mature in September 2000, agreed to convert their holdings into the augmentation of the DM Eurobonds and, at the same time, provide new money of $25 million. Finally, Bank of China agreed to place a deposit with the NBU of $30 million with an eight-month maturity.

9.  Effective September 1, 1999, communal tariffs in the city of Kyiv will be raised by about 20-25 percent. Also, the reversal of tariff increases for gas and electricity has been corrected in Kyiv, and, as a result, tariffs for gas and electricity throughout Ukraine, are now set at levels established by the March 10, 1999 resolutions of the National Energy Regulation Commission. In the light of these actions, we request a waiver for the nonobservance of the structural performance criterion for end-June on communal service tariffs for the city of Kyiv. Moreover, all other communal tariff increases that were envisaged under our Fund-supported program but not implemented, will be put in place if the Constitutional Court has reestablished the government's authority in this area which we expect to take place by mid-September. The purchase that is scheduled for late September 1999, will also be contingent upon the implementation of these tariff increases.

10.  Progress has been made in enhancing the transparency of the energy sector and to broaden participation in the gas auction. The regulation that required large enterprises to purchase gas solely from Naftogas Ukrainy have been removed and the government will seek parliamentary approval, in the context of the 2000 budget, that all gas received as transit fees will be sold through the auction and all proceeds (net of transport costs) will be reimbursed, at the auction price, to the budget. Moreover, efforts have been accelerated to increase cash collections for gas consumption from households, and discontinue service for nonpaying enterprises. With these actions, we anticipate that gas volumes sold for cash at the auction will rise to the levels envisaged in the program. We will also take steps to audit the operations of Naftogaz Ukrainy and ensure that the recently created commission for electricity regulation remains an independent agency for the sector.

11.  The banking sector reform is moving forward with the assistance of Fund and World Bank staff. The restructuring of the seven largest banks is being implemented as envisaged in the agreed action plans. On-site examinations of two large banks have been completed and the remaining banks will be examined by end-year. The draft Law on Banks and Banking Activity was submitted to parliament in June. The law will provide a legal basis for strengthening the prudential regulation of the banking system. In addition, we intend to reform second tier banks and modify the deposit insurance scheme to include provisions that would allow exclusion of problem banks (including in particular any of the seven large banks if they should fail to comply with the restructuring agreements), so that any costs of the scheme will first be funded by the scheme itself and then by the government, but not the NBU. Finally, the government and the NBU intend to work closely with parliament to introduce new amendments to the NBU law so as to enhance the NBU ability to pursue market based monetary, exchange and payments policies that aim for promotion of price stability in Ukraine.

12.  With the assistance of the World Bank, we intend to make substantial progress in implementing public administration reform over the next few months. We are taking the necessary steps to ensure the full restructuring of the Apparat of the Cabinet of Ministers and the Ministry of Finance by end-December. In addition, we have formulated a timetable for the reform of the ministries of economy, agriculture, labor and social policy. The strategy will help improve the formulation and execution of public sector policies (including tax policy) and consolidate sectoral policy departments across ministries.

13.  The privatization program is a key element in the government's strategy to promote economic growth, increase investment and ease the heavy external debt service burden in 2000 and 2001. An ambitious privatization plan, possibly entailing the issue of asset-backed securities is being formulated. As an initial step, a draft law establishing the legal basis for the privatization of large enterprises, including enterprises in the energy and telecommunications sectors, will be submitted to parliament shortly. Preparatory work for the privatization of ten enterprises will be completed by end-year. We also intend to unblock shares in 304 grain procurement and storage facilities for sale and to sell shares in at least 20 additional large grain elevators through June 2000. In the area of deregulation, we have already eliminated license-like permits introduced by the Cabinet of Ministers and submitted a draft law to the Rada to remove all license-like permits and similar restrictions that contradict the Law of Entrepreneurship and those that were established by presidential decree.

14.  In the area of agriculture sector reform, steps are being taken to reduce government interference and promote the settlement of transactions with cash. Local governments have been instructed to discontinue practices that interfere with the movement of grain and contradict existing legislation. Government agencies (including the tax authority, state reform fund, and pension fund) will be requested to collect claims on farmers only in cash and conduct the sale of grain stocks through commodity exchanges. Furthermore, bankruptcy procedures were initiated for 100 large insolvent collective farms and a decree has been issued to provide for the corporatization of "Bread of Ukraine".

15.  The remaining foreign exchange restriction that was inconsistent with Article VIII of the Fund's Article of Agreement (on the convertibility of certain hryvnia balances held by non-residents) was eliminated in early August. The foreign exchange system is now free of restrictions for current transactions and we will refrain from introducing any future restrictions. In the trade and payments system, the President vetoed in late July the introduction of an export duty on sunflower seeds approved by parliament. Parliament has continued to oppose the elimination of the export duty on skins and hides. Nevertheless, every effort will be made to secure the removal of this duty before the end of the year.

16.  Despite the progress made under the program, we realize that the macroeconomic situation will continue to be fragile in 1999 during the election period and that the outlook for 2000 remains difficult. The government will be addressing these issues as well as measures to broaden the tax base in the context of the preparations for the 2000 budget. Given the heavy external debt service payments falling due next year, it is clear that, even with significant external assistance and forbearance of creditors, a sizable tightening of the fiscal stance will be necessary. The government is committed to work closely with Fund staff on the budgetary preparations and progress in this area will be a central focus of the fourth review of the program. We realize that strengthening of public finances will require an acceleration of the government's overall structural reform program. We will also continue to explore further options for new access to international capital markets, including through instruments such as asset-backed securities, as well as options for voluntary restructuring of claims held by other creditors.

17.  We believe that the measures described in this letter will be sufficient to bring the fiscal program back on track and accelerate structural reforms so as to achieve the objectives of the arrangement supported by the Fund. On this basis, we request the completion of the current review and, as noted above, the modification of performance criteria for August and September, and establishment of performance criteria for end-December. In addition, a new adjuster has been added for the deficit of the consolidated budget for privatization proceeds in excess of programmed amounts. The fourth review under the program, based on end-September 1999 performance, will, among other things, focus on the 2000 budget and the implementation of the privatization program. The fourth program review is scheduled to be completed by November 19, 1999.

 
/s/
Valeriy Pustovoitenko
Prime Minister
  /s/
Victor Youshchenko
Chairman
National Bank of Ukraine
 

Table 1. List of Prior Actions for Completion of
the Third Review under the Extended Arrangement

Communal tariffs

Repeal the decision of Kyiv city council of April 29, 1999 on lowering the tariffs for electricity and natural gas and ensure that payments for these services are made according to tariffs introduced by National Energy Regulation Commission Resolutions No. 309 and 310 of March 10, 1999.

Raise communal tariffs in the city of Kyiv on rent in a manner that will increase the total communal tariff bill by 20-25 percent.

Energy sector

Sell at least 500 million cubic meters of gas at auction during August, without any price restriction.

Publish summary transactions of Naftogas Ukrainy, including monthly prices and quantities of gas sold to consumers outside auctions.

Issue conditions of tender for the audit of the production costs and accounts of Naftogas Ukrainy, in line with recommendations made by World Bank staff.

Eliminate the requirement that 300 large enterprises must purchase 50 percent to 100 percent of their gas needs solely from Naftogas Ukrainy.

Administrative reform

Presidential approval of the new statute and functions of the ministry of finance, including tax policy and external debt management, in line with Fund and World Bank staff recommendations.

Deputy prime minister approval of action plans for the restructuring of the ministries of health and education, in line with recommendations provided by World Bank staff.

Develop a draft structure and functions of the ministry of agriculture, and labor and social policy in line with recommendations provided by World Bank staff.

Agriculture

Presidential veto of the law introducing export duties on sunflower seeds.

Adopt presidential decree to corporatize the "Bread of Ukraine".

Issue an instruction that gives the necessary authority to the State Committee on Entrepreneurship to monitor and report weekly to the Cabinet of Ministers on practices that interfere with the movement and cash sale of grain and that contradict existing legislation.

Announce publicly that there are no impediments by local governments to the movement of grain across regions.

Banking sector

Submit to parliament a draft law on deposit insurance, in line with recommendations provided by the Fund and World Bank staff, which contains provisions that would allow problem banks to be excluded (in particular any of the seven large banks, if they fail to comply with the formal restructuring agreements), and ensures that any costs of the scheme would first be funded by the scheme itself and then by the government but not by the NBU.

Fiscal sector

Establish a full-service large taxpayer unit at the state administration headquarters and appoint head and senior staff for the unit.

Adopt a joint plan by the NBU and treasury to implement a pilot project for the treasury single account at the NBU, in line with recommendations made by Fund staff.

Rescind Cabinet of Ministers Resolution that provides for the issue of promissory notes by local governments by September 1.

Privatization and deregulation

Unblock government shares in grain elevators that have sold up to 70 percent of their shares.

Adopt a Cabinet of Ministers resolution to unblock shares in 304 grain procurement and storage facilities for sale whose shares remain under state ownership.

Submit to parliament a proposal to introduce amendments to laws requiring the removal of all license-like permits that contradict the Law on Entrepreneurship.

Annul those licenses and license-like permits introduced by Cabinet of Ministers' resolutions, which do not comply with criteria on public health, environmental protection, and national security.

Trade and exchange system

Eliminate the exchange restriction on the repatriation of interest by nonresidents.
 

Table 2. List of Structural Policy Measures
for the Remainder of 1999 under the EFF-Supported Program

Energy sector

Sell gas through the cash auctions (without any price restrictions) consistent with the monthly targets under the program.

Audit the production costs and accounts of Naftogas Ukrainy by end-June 2000.

Administrative reform

Complete the functional review and approve a new statute and functions for the Apparat of the Cabinet of Ministers by end-December (benchmark), in line with recommendations agreed with the World Bank.

Adopt action plan for civil service reform by end-September, in line with recommendations provided by the World Bank.

Approval by the Cabinet of Ministers of new structure and functions of the ministries of health and education by end-October, in line with recommendations provided by the World Bank.

Presidential approval of the new statute and functions of the ministry of economy, including the consolidation of all sectoral departments, by end-October in consultation with World Bank staff.

Implement the new statute and functions of the ministry of finance, including the transfer of tax policy functions from the State Tax Administration, consolidation of all sectoral policy departments under the budget department by end-December, and develop tax policy and macroeconomic forecasting capacity to accommodate the new functions of the ministry.

Restructure the Apparat of the Cabinet of Ministers by end-December, in line with recommendations agreed with the World Bank.

Agriculture

Instruct central and local government agencies to discontinue the practice of accepting grain in lieu of cash in the settlement of farmers' debts by end-September.

Instruct central government agencies, including the State Reserve Fund, tax authority and pension fund, to conduct sales of grain stock through commodity exchanges only for cash by end-September, with no further contracts to be specified in-kind, and all outstanding debt to be settled in cash at market prices.

Monitor the requirement that any central and local government agency procure grain only through the commodity exchanges for cash, publish monthly information on this, and issue first monthly report by end-September.

Implement pilot projects on the use of land as collateral by end-December.

Banking sector

Assign, on a full time basis, a group of banking supervisors to establish a framework for comprehensive on-site examination of banks with total assets greater than Hrv 100 million, by end-August.

Complete adjustment of the on-site examination manual in line with procedures used for the diagnostic studies, by end-December.

Complete on-site examination for the seven large banks, by end-December.

Fiscal sector

Increase staffing for tax enforcement and establish targets for collection of arrears by oblast, type of tax, age of arrears, potential revenue loss and complexity by end-September, in line with recommendations made by Fund staff.

Extend the coverage of the treasury to all central government expenditures by end-September, closing all individual bank accounts of central government spending units, including all extrabudgetary accounts, and centralizing all payments and accounting arrangements through the treasury.

Adopt a joint resolution of the Cabinet of Ministers and the NBU on establishing a TSA and establish a task force in the treasury for implementing the TSA, consisting of the cash management unit, TSA operations methodology unit, relevant IT units by September 15. Ensure appropriate funding and staffing of the task force.

Establish one full-service large taxpayer unit, including appointment of head and staff, and identify and adopt the necessary procedures to cover at least 200 enterprises per unit (responsible for 80 percent of tax revenue and 90 percent of arrears in the region) by end-December (benchmark), in line with recommendations made by Fund staff.

Select a target computer system for the State Tax Administration and one transitional computer system by end-October. Eliminate all other competing computer systems by
end-December, in line with recommendations made by Fund staff.

Finalize property revaluation for the land tax in a manner that would yield additional revenues of Hrv 50 million by end-December.

Consolidate bank accounts into the Treasury Single Account (TSA) at the NBU in one pilot oblast, including treasury department and all local treasury units in this oblast by end-December 1999, except for treasury accounts with commercial banks for cash disbursement purposes in locations remote from NBU branches, where balances should not exceed 24-hour payment needs.

Privatization and deregulation

Presidential approval of the state regulatory policy concept by end-September, in line with recommendations of the World Bank.

Submit to parliament a draft law on licensing by end-September, in line with recommendations from the World Bank.

Complete privatization of the remaining 43 of the 443 enterprises under "Bread of Ukraine" (70 percent of shares) by end-September. Fully privatize 20 large grain elevators by
end-June 2000.

Establish the necessary legal framework for privatization and complete the preparatory process for a number of large enterprises including Ukrtelecom and electricity enterprises by end-December (benchmark).

Trade and exchange system

Make every effort to secure parliament approval of the removal of the export duty on hides and skins by end-December.

Refrain from introducing any new restrictions on exports throughout the period.


 

Ukraine--Technical Memorandum

Performance Criteria and Financial Benchmarks

Net international reserves of the National Bank of Ukraine (performance criterion)

Net international reserves of the NBU (NIR) are defined as the difference between gross usable foreign reserves and short-term liabilities to nonresidents with an original maturity of up to and including one year, and including all Fund purchases. For the purposes of the program, gross usable foreign reserves and short-term liabilities to nonresidents will be based on the following classification.1


Type of Foreign Reserve Asset or Liability NBU Balance Sheet Accounts

1.   Gross foreign reserves (In convertible currencies)  
  Monetary gold in vault
Monetary gold in foreign banks
Foreign exchange in cash
Demand deposits at foreign banks
Short-term gold deposits at foreign banks
Short-term time deposits at foreign banks
Long-term deposits at foreign banks
Holdings of SDRs
Securities
1100,1107
1101
1011,1017
1201,1202
part of 1213
1211
1212
IMF, Treasurer's Department
1301,1305,1307, minus 1306
 
2. Short-term liabilities to nonresidents
(In convertible currencies)
 
  Correspondent accounts of nonresident banks
Short-term deposits of nonresident banks
Operations with nonresident customers
IMF accounts No. 1 and No. 2
Use of Fund credit
3201
3206,3207,3211
3230,3232-5
3220,3221
IMF, Treasurer's Department

The definition excludes any foreign assets held at domestic institutions. These assets comprise all foreign currency claims of the NBU on domestic banks, and NBU deposits held at the Interbank Foreign Currency Exchange market and domestic banks for trading purposes. The definition also excludes any precious metals or metal deposits, other than gold, held by the NBU, as well as gold deposits that are pledged through derivative contracts. Finally, the definition excludes international reserves that correspond to deposits of commercial banks held in foreign currency at the NBU, as well as any international reserves that are (a) encumbered, (b) pledged as collateral for foreign loans, (c) frozen (d) pledged through derivative contracts.

The NIR of the NBU for the period July to December 1999 will be subject to two automatic adjusters. The first will adjust the NIR for the amounts by which foreign financing2 deviates from the programmed levels (specified in the table below). Specifically, if the proceeds from foreign financing:

(a)  exceed the program limits, the NIR floor for the month will be increased by 100 percent of the additional financing;

(b)  fall short of the program limits, the NIR floor for the month will be reduced by 100 percent of the shortfall but the amount of the adjustment cannot exceed $100 million.

Ukraine: Cumulative Foreign Financing, January-December 1999
(In millions of dollars, from January 1, 1999)
June July August September October November December
190 290 450 585 625 655 704

The second adjuster will automatically increase the NIR of the NBU by (a) 100 percent of the amount of any new SDR allocation from the IMF and (b) 100 percent of the recovery of any maturing foreign currency deposits of the NBU not included in usable international reserves.

For the period April 1999, through the end of the program, the international reserve assets and liabilities of the NBU denominated in currencies other than the U.S. dollar, except those held in SDRs, will be converted from other currencies into U.S. dollars at the official NBU fixed cross exchange rates prevailing on April 30, 1999. SDR assets and liabilities, which will be taken from the records of the IMF Treasurer's Department, will be converted into U.S. dollars at the exchange rate of $1.35123 per SDR. Official gold holdings will be valued for the period of the program at $279.80 per ounce, which was the London gold price on April 30, 1999. On April 30, 1999, the NIR as defined above amounted to $ -1,987 million.

Information source: Monetary statistics (10R) provided monthly by the NBU. For daily monitoring purposes, the NBU will continue to provide the standard daily data sheet throughout the period of the program.

Net domestic assets of the NBU (performance criterion)

For the period April 1999, through the end of the program, the international reserve assets and liabilities of the NBU denominated in currencies other than the U.S. dollar, except those held in SDRs, will be converted from other currencies into U.S. dollars at the official NBU fixed cross exchange rates prevailing on April 30, 1999. SDR assets and liabilities, which will be taken from the records of the IMF Treasurer's Department, will be converted into U.S. dollars at the exchange rate of $1.35123 per SDR. Official gold holdings will be valued for the period of the program at $279.80 per ounce, which was the London gold price on April 30, 1999. On April 30, 1999, the NIR as defined above amounted to $ -1,987 million.

Information source: Monetary statistics (10R) provided monthly by the NBU. For daily monitoring purposes, the NBU will continue to provide the standard daily data sheet throughout the period of the program.

Net domestic assets of the NBU (performance criterion)

The net domestic assets of the NBU are defined as the difference between monetary base and the NIR of the NBU, with the NIR as defined above and valued at the accounting exchange rate of Hrv 3.9244 per dollar and expressed in hryvnia. On April 30, 1999, NDA of the NBU amounted to Hrv 16,939 million.

The NDA of the NBU for July-December 1999 will be subject to an automatic adjuster for the amounts by which foreign financing deviates from the programmed levels specified in the table below.

Programmed Levels of Foreign Financing for the Budget,
January-December 1999

Cumulative since January 1, 1999 (in millions of hryvnias)
   June  July Aug. Sept. Oct. Nov. Dec.
Foreign financing    746    1,140    1,766    2,296    2,453    2,570    2,752  

If the proceeds from foreign financing:

(a) exceed the program limits, the NDA ceiling for that month will be reduced by 100 percent of the additional financing;

(b) fall short of the program limits, the NDA ceiling for that month will be increased by 100 percent of the shortfall in financing.

The NDA will also be adjusted by 100 percent for the recovery of any maturing foreign currency deposits of the NBU not included under usable international reserves.

Foreign currency amounts will be converted to hryvnia at the accounting exchange rate of Hrv 3.9244 per dollar. Foreign currency amounts received in currencies other than the U.S. dollar, will be converted into U.S. dollars at the official NBU fixed cross exchange rates prevailing on April 30, 1999.

Information source: Monetary statistics (10R) provided monthly by the NBU. For daily monitoring purposes, the NBU will continue to provide the standard daily data sheet throughout the period of the program.

Deficit of the consolidated budget (performance criterion)

The consolidated budget is defined as (i) the state budget, which consolidates the republican budget, the local budgets, the Chernobyl, Pension, Employment, State Reserve, and Innovation Funds, and all budgetary foreign currency operations; (ii) all other extrabudgetary funds included in the monetary statistics compiled by the NBU; and (iii) all credit to nongovernment units that is guaranteed by the government or the NBU, excluding on lending by the budget of official credits.

For the purposes of the program, the deficit of the consolidated budget will be measured as:

  • total net treasury bill sales as measured by the information kept in the NBU registry of treasury bill sales (net treasury bill sales are defined as the cumulative total funds realized from the sales of treasury bills at the primary auction less the cumulative total redemption of principal on treasury bills); plus

  • other net banking system credit to government as measured by the monetary statistics provided by the NBU (this consists of all non-treasury-bill financing in either domestic or foreign currency extended to the budget by banks less all government deposits in the banking system); plus

  • receipts from privatization; plus

  • all credit to nongovernment units that is guaranteed by the government or the NBU, excluding on-lending of official foreign credits; plus

  • net proceeds from bonds issued by any local authority for the purpose of financing deficits of the consolidated budget; plus

  • net proceeds from any bonds issued by the government or the NBU to nonresidents for purposes of financing the deficit of the consolidated budget; plus

  • the difference between disbursements of foreign credits to the consolidated budget and the amortization of foreign credits by the consolidated budget; plus

  • the decline in government deposits in nonresident banks, or other nonresident institutions.

For the purposes of measuring the deficit of the consolidated budget, all flows to/from the budget in foreign currency will be converted into hryvnia at the official exchange rate prevailing at close of business on the date of the transaction.

The deficit of the consolidated budget will be adjusted downward by 100 percent of the amount of the shortfall in the repayment of interest on treasury bills held by the NBU.

The deficit for end-December is bases on an estimate of privatization receipts of Hr 720 million. The deficit for end-December will be adjusted upward by 100 percent of the excess in privatization receipts and the performance criterion on the stock of budgetary arrears will be adjusted downwards by the same amount.

Information source: NBU daily treasury bill sheet for net treasury bill sales; monetary statistics provided monthly by the NBU for other net banking system credit to government; monthly budget execution data for privatization receipts; State Commission for Securities and Exchange for net proceeds from bonds issued by local authorities; Ministry of Finance or NBU, as appropriate, for net proceeds from foreign borrowing from the capital markets for purposes of financing the deficit of the consolidated budget; Ministry of Finance for disbursements of foreign credits to the consolidated budget and amortization of foreign credits by the consolidated budget; and Ministry of Finance for government deposits in nonresident banks or other institutions. For daily monitoring purposes, the NBU will continue to provide the standard daily data sheet and the Ministry of Finance will continue to provide weekly data on foreign credits to the consolidated budget and amortization of foreign credits by the consolidated budget throughout the period of the program.

Unearmarked state cash revenue (performance criterion)

Unearmarked state cash revenue includes all taxes, fees, and charges levied by the central government that are not earmarked by law for specific expenditure programs and collected in cash. Not included in the definition of revenue are any proceeds from loans or other banking system credits, the issuance of securities, the sale of state assets, or transfers from local governments.

Stock of budgetary arrears on wages, benefits, and pensions (performance criterion)

Budgetary arrears include all arrears of the consolidated budget on wages, social benefits (including arrears on Chernobyl pensions), pension obligations of the state budget owed to the Pension Fund, and pensions owed by the Pension Fund. Arrears are defined as overdue payments. Wages are defined to include all forms of remuneration for work performed, including, but not limited to, payments in cash and in-kind for standard and overtime work. Pension obligations of the Pension Fund include retirement pay and all other obligations of the Pension Fund.

The adjuster for privatization receipts defined for the performance criteria on the deficit of the consolidated budget applies.

The stock of budgetary arrears as defined above was Hrv 4,339 billion on
December 31, 1998.

Information source: Ministry of Finance.

External arrears by the government and the NBU (performance criterion)

External arrears include all arrears to official creditors. The criterion for non-accumulation of external arrears applies on a continuous basis.

Contracting or guaranteeing nonconcessional external debt (performance criterion)

The ceilings on contracting or guaranteeing nonconcessional external debt apply to the contracting or guaranteeing by the government or the NBU of new nonconcessional external debt with an original maturity of more than one year; and within this limit, with an original maturity of more than one year and up to and including 3 years. Concessional loans are defined as those with a grant element of at least 35 percent of the value of the loan, using currency-specific discount rates based on the commercial interest rates reported by the OECD (CIRRs). Discount rates for assessing the concessionality of loans with a maturity of at least 15 years will be based on the average CIRRs over the last ten years. The assessment of concessionality for loans with maturities of less than 15 years will be based on the average CIRRs of the preceding six-month period.3 In addition, during the program period, neither the Government nor the NBU shall contract or guarantee debt of an original maturity of one year or less, other than normal import financing. Excluded from the limits is the use of Fund resources; but other balance of payments support--including loans from official creditors and foreign banks, and bond issues--is included within these limits. The amount of new debt issued in exchange for existing Merrill Lynch notes is excluded from the limits. Also excluded are net sales of Ukrainian government treasury bills to nonresidents. The amount of debt contracted or guaranteed will be valued at the relevant currencies of denomination and converted into dollars using the NBU's official exchange rates prevailing at the time the debt is contracted.

Information source: Ministry of Finance for amounts and terms of all external debt contracted or guaranteed.

Communal services tariffs

The Ministry of Economy will provide summary information on actual increases since the beginning of the year in communal service tariffs in all regions for major services (heating, water supply, sewage, rent, and public transportation). In addition, the Ministry will also provide the methodology underlying the calculations of full cost recovery, including electricity and gas.

Continuous performance criteria

Refrain from introducing any new restrictions on exports throughout the program period.

Structural performance criteria

All tariff increases that were reversed by regions outside Kyiv since April to be reinstated by September 20 as part of the conditionality for the purchase based on the end-August performance criteria.

Monetary base (indicative indicator)

The NBU's monetary base (base money) comprises domestic currency outside banks and banks' reserves, including cash in vault.4

  1. Currency outside banks is defined as:

        Currency (NBU accounts 3000 (net)+3001 (net)-3007-3009-(1001:1005)-1007-1009-1021-1027)

minus

        cash in vault at deposit money banks (DMBs) (DMB accounts 1001, 1002, 1003, 1004, and 1007).

  1. Banks' reserves are defined as cash in vault at DMBs (as defined above) plus DMB correspondent account deposits at the NBU in hryvnia (accounts 3200, 3202, 3211, 3212)

On April 30, 1999, base money as defined here amounted to Hrv 9,142.8 million.

Information source: Monetary statistics provided monthly by the NBU. For daily monitoring purposes, the NBU will continue to provide the standard daily data sheet throughout the period of the 1998-2001 program.

Gross purchase of treasury bills by the NBU (indicative target)

The maximum amount of treasury bills purchased by the NBU cannot exceed the cumulative monthly limits shown in the following table.

Ceilings of Treasury Bills Purchased by the NBU
Cumulative since May 1, 1999
(in millions of hryvnias)
  June July Aug. Sept. Oct. Nov. Dec.
NBU purchases of T-bills 954 1,532 1,682 1,682 1,782 1,782 2,030

Other

1.  Exchange rates

The program exchange rate is the end-April rate of Hrv 3.9244 per dollar.

2.  NBU accounting

All foreign assets and liabilities of the NBU will be included in the NBU balance sheet, valued at the official exchange rate prevailing on the day for which the balance sheet is compiled.

All NBU claims on and liabilities to the IMF will be included in the NBU balance sheet.

Reporting requirements and monitoring information

To monitor performance under the arrangement, the NBU will provide to the IMF, no later than the twenty-fifth day of each month, an aggregate balance sheet for the NBU and a consolidated balance sheet for the deposit money banks. The NBU will communicate to the Fund staff any changes in accounting conventions and valuation principles incorporated into the balance sheet data.

Every ten days, the NBU will provide the Fund with the operational monetary survey and the operational monetary survey of the NBU.

Every day, the NBU will report to the Fund the standard daily reporting sheet, including the figure for total net treasury bill sales from the registry information of the NBU, non treasury-bill credit to the budget from both the NBU and commercial banks, the stock of NIR, base and broad money, foreign exchange intervention on the birzha and the interbank market, and the official exchange rate for the previous day.

The NBU, no later than the 10th day of each month, will provide information on the purchases of treasury bills in the primary market during the previous month.

The Ministry of Finance will report operational data on cash unearmarked state revenue to the Fund on a weekly basis. Monthly revenue and expenditure figures of the consolidated, state and local government will be reported no later than 25 days after the end of the month.

Information on the amounts and terms of all external debt contracted or guaranteed by the general government will be reported to the Fund once a month, no more than 15 days after the end of the month. The NBU will report data on non-official debt.

The Ministry of Finance will provide data on the stock of all budgetary arrears on a monthly basis, no more than 25 days after the end of the month: specifically wages, pensions, social benefits, energy, communal services, and other arrears on goods and services.

On a monthly basis, Naftogas will publish the following information in either "Uriadoviy Kurier" or "Golos Ukrainy" by 15th date of each month:

1.  Gas sales volumes, aggregate and by categories, including (i) budgetary organizations, (ii) power plants, (iii) communal services (district heating, etc., but excluding power plants operating on the combined cycle), (iv) households, (v) metallurgy, (vi) chemical industry; (vii) other industrial consumers; (viii) any other consumers not covered by previous categories.

2.  Payments for gas by above categories of consumers, including information on (i) share of cash paid; (ii) share of barter settlements; (iii) share of settlements by "financial instruments" (e.g., promissory notes of all kind, off-sets, etc.).

3.  Arrears, including aggregate arrears for each category of consumers and arrears accumulated since the beginning of the calendar year for each category of consumers.

4.  List of the 10 largest non-payers in each customer category by month; one list with the largest accumulated stock of receivables at the end of the month, and another list with the largest addition to the stock of arrears during that month (flow).

5.  Gas sales volume to above categories of consumers administrated through commercial intermediaries.

6.  Gas sales prices with a breakdown by consumers as outlined in paragraph 1 above.

In addition to these reporting requirements, the Ukrainian authorities will provide all other information as specified in the above sections on information requirements.


1The definitions used in this technical memorandum will be adjusted to reflect any changes in accounting classifications introduced during the period of the program. The definitions of the foreign accounts here correspond to the system of accounts on
March 31, 1999.
2Foreign financing is defined as disbursements of balance of payments support loans with a maturity of more than a year from multilateral and bilateral official creditors and resources raised in international capital markets by the government or the NBU, including restructuring or refinancing of existing foreign loans and treasury bills held by nonresidents. This excludes use of IMF resources, or other resources that create a short-term liability on the balance sheet of the NBU.
3Margins added to CIRRS will be 75 basis points for loans with maturity of less than 15 years; 100 basis points for loans with maturity of at least 15 years and less than 20 years; 115 basis points for loans with maturity of at least 20 years and less than 30 years; and 125 basis points for loans with maturity of at least 30 years.
4The definitions set out here will be modified to include any other accounts that may be identified or created in the future in connection with domestic currency issue and the deposit money banks' deposits at the NBU.