2. External Financing

The rehabilitation loan in the amount of 398 mln USD and EU bilateral agreement credit of 100 mln USD formed the major sources of external financing in 1995. Meanwhile we see gradual growth of external financing share, mainly by the World Bank (roughly 56%), EU and Japan in 1996.

Table 1. Gross Emission of Commercial Loans*, 1996-1998 mln USD
Consortium	1996	1997	1998
Chase Manhattan Bank Luxembourg S.A.	110	572	281
Bankers Trust Luxembourg S.A.	450	533	0
E.M. Sovereign Investments	0	504	-245
Bavarian United Bank	0	129	-36
*This table covers only the so-called fiduciary loans: the loans guaranteed by a third party, i.e. foreign commercial bank, but not by Ukrainian government directly.

To compensate for a negative net disbursement of Tbills in the Fall of 1997, government was forced to search for funds on private markets. Two tranches of hryvnia denominated hedged securities were issued in December 1997 and August 1998. The December issue raised 750M UAH through Merrill Lynch and the August issue, roughly 330M UAH through ING Barings bank.

Figure 5. Consolidated Deficit Financing % Source: State Treasury, UEPLAC, NBU. Calculations: ICPS

To improve the situation further, the Finance Ministry has issued three groups of eurobonds. First, Ukraine received ECU 488M from Euro-denominated Eurobonds floated in ECU in March, 1998. In May of the same year a second tranche of deutsche mark-denominated three-year Eurobonds generated DEM 259.35M.

External borrowing from official creditors has substantially contributed to financing in 1997, bringing to budget gross 600 mln USD, from the conditional World Bank loans, EU and other official creditors. The following year this borrowing decreased, resulting in a decline of the external financing share.

Figure 6. Consolidated Deficit Financing By T-bills % of government balance Source: State Treasury. Calculations: ICPS

3. T-bills (OVDP) Financing

The consequences of NBU direct financing had proved that the elimination of this mechanism was required to provide a sound commitment to lowering inflation. Ukraine’s T-bill market was created in the second quarter of 1995. The terms of circulation were 1-, 2-, 3-, 6-, 9-, 12- and 18-months. The new bonds had fixed redemption date, and were structured as short-term and long-term securities. Most of the long-term securities have been purchased by the NBU.

Figure 7. Deficit Financing Sources by Origin % Source: State Treasury, UEPLAC. Calculations: ICPS

In 1996 T-bills financing had reached the level of some 23% of the total. The discount version of T-bills was introduced in May, 1996. Also the secondary market was established. Access to Tbills was secured for foreign investors in the fall of 1996. Strong inflow of funds started.

Figure 8. Nominal Domestic Debt Stock and Effective Rate of Return mln UAH (left scale), % annual rate (right scale) Source: State Treasury, State Statistics Committee. Calculations: ICPS

The performance of T-bills markett was relatively positive till mid-1997. After the Fall of 1997, foreigners began to withdraw their funds from this market and NBU purchases grew to be the majority share.

In 1999, the current deficit was financed by means of domestic loans. Until the beginning of December 1999 the government issued OVDP (T-bills) totalling to 2048 mln Hrn. The growing volume of domestic financing is to a large extent being caused by the shortage of external sources of funds. Because of the crash of the domestic borrowing market in August 1998, the NBU had remained the major buyer. After the approval of law giving the National Bank a new status, direct purchases of T-bIlls for budget financing was legally prohibited, thus forcing NBU to transfer T-bills through the secondary market using Oschadbank as a primary buyer.