At the request of the IMF staff, Pricewaterhouse-Coopers (PwC) has been commissioned by the NBU to carry out a special examination of the transactions affecting the reserves in 1997-98. When completed, the results will be published. In the meantime, this statement sets out the IMF staff’s current understanding of the transactions to which the allegations relate. It explains when the staff learned about the transactions and the remedial actions that have been taken.
In summary, on the basis of the information currently available to IMF staff, it appears that a number of transactions in 1996-98 gave the impression that Ukraine’s reserves were larger than was actually the case. Relatively few of these transactions appear to have resulted in Ukraine’s receiving disbursements that it would not otherwise have been entitled to receive. Pending the final results of PwC’s special examination, the view of the IMF staff is that Ukraine appears to have received disbursements from the IMF on three occasions in late 1997 and early 1998 that it would not have done if the true state of Ukraine’s reserves had been known at the time. The IMF will review this thoroughly when the results of the special examination are available. Since the approval of the subsequent arrangement for Ukraine under the EFF in September 1998, new safeguards have been put in place and there has been no evidence of similar problems.
In recent months, the IMF has been considering ways to strengthen safeguards on the use of IMF resources and also how best to address cases where national authorities misreport information to the IMF. It is anticipated that further safeguards will be adopted after the IMF Board has discussed this issue in the coming weeks.
Since it became clear to IMF staff in August 1998 that part of the NBU’s reserves were tied up, a number of actions have been taken under the current EFF arrangement to correct the situation. First, the NBU ensured that all its liquid reserves were held in first-rank international banks. Second, it allowed virtually all of the transactions that had rendered part of its reserves illiquid to unwind, and it undertook not to carry out similar transactions in the future. Third, it agreed that PwC would conduct quarterly audits of the reserve position of the NBU in the future. While PwC made a brief check on the end-September 1998 position, the first full quarterly audit was undertaken for the reserves at end-December 1998, when an additional transaction was revealed. Subsequent audits have not revealed any further transactions of this nature.
Under the EFF arrangement, the IMF staff has been monitoring the level of reserves daily to help ensure that they are liquid, and there has been no evidence of problems similar to those noted above. More specific targets have been set for liquid reserves, and decisions about IMF disbursements have related to performance compared with these targets.
No remedial action was taken following the revelation to the IMF staff in April 1999 of the $150 million round-tripping exercise in November 1997. At that time, the staff members concerned assumed that the formal requirements of the Stand-By Arrangement that was in place in August 1997 through August 1998 were not breached, and they knew that the transaction had been unwound in January 1998. However, it does now appear likely to the IMF staff that there was a breach of the requirements of the Stand-By Arrangement as a result of this transaction.
The NBU has initiated a special examination of all transactions above $20 million affecting the reserves between December 31, 1996, and September 30, 1998. The results covering the key period from July 31, 1997, to January 31, 1998, are expected by the end of March, and those for the rest of the period by the end of June. The NBU has implemented some improvements in reserve management practices and is discussing further changes with IMF staff. In the event any future disbursements from the IMF are approved, the Ukrainian authorities have agreed that they will voluntarily keep the proceeds in an account in the IMF. When the results of the special examination are available, the IMF will consider further remedial actions.
In the IMF Survey dated March 6, there was an error in the story on emerging markets. The next-to-last sentence on page 76 should have read: “The more complete such information is and the more widely disseminated, the better equipped the private sector is to make its own risk assessment and to decide how fully it wishes to participate.”