News Brief No. 00/26

News Brief: Release of PricewaterhouseCoopers Report on the National Bank of Ukraine

May 4, 2000

1. The National Bank of Ukraine (NBU) has released a report from a special examination by PricewaterhouseCoopers (PwC) of its foreign reserves management for the period July 31, 1997 to January 31, 1998 and as of December 31, 1996. The NBU commissioned the report at the request of the IMF staff following various reports that the NBU carried out a number of transactions that gave the impression that Ukraine's foreign exchange reserves were higher than was actually the case. The IMF has posted the PwC report on its website at www.imf.org. At the requirement of PwC, the report is available in a read-only version.

2. The PwC report describes 21 sets of transactions during 1996-97 by the NBU with a total value of US$1,276 million that may have affected the size of Ukraine's reserves. (The transactions are described in section 7 of the PwC report and summarized in Table 7.) The report also examines whether the NBU adhered to the procedures for calculating net international reserves (NIR) and net domestic assets (NDA) which are required under the stand-by arrangement approved for Ukraine on August 25, 1997. Based on the information provided in the report, it would appear that because of the inclusion of assets which should not have been included in calculating the NIR, NBU's reserves were potentially overstated by an amount that varied from US$391 million in September 1997 to US$713 million in December 1997.

3. Although it discloses some transactions of which the Fund was previously unaware, the PwC report confirms the IMF staff's understanding of Ukraine's use of its foreign exchange reserves described in the News Brief of March 14, 2000 (IMF News Brief No. 00/15). The report also confirms that, by giving a misleading impression of the size of Ukraine's reserves, the NBU's reserve management practices may have allowed Ukraine to receive as many as three disbursements under the stand-by arrangement in effect at that time that it might not otherwise have been able to obtain. And finally, the report confirms that, with the exception of a US$15 million loan that the NBU has declared non-performing, the NBU received all the money it was due under the transactions that the NBU carried out. Within the scope of the special examination, no evidence of misappropriation of Ukraine's reserves was found. However, some of the non-Ukrainian banks have not confirmed the transactions with the NBU as requested by PwC and the report does not cover earnings derived from investments undertaken by third party banks.

4. The IMF views very seriously any misreporting arising from overstating the level of reserves. The IMF's Executive Board will decide whether Ukraine, by misreporting the level of its reserves, breached its obligation to provide the Fund with accurate information under the Fund's Articles of Agreement or obtained disbursements under an IMF arrangement that it would not otherwise have received. The three disbursements in question that would have been affected by the transactions examined in the PwC report were based on October, November, and December 1997 figures. They total SDR 145 million (about US$200 million). Once a final determination on misreporting is made, the Executive Board will decide what remedial actions may be appropriate.

5. The next stage of the PwC special examination will cover the period from November 30, 1996 to July 31, 1997. That report is expected to be completed in June 2000 and it will also be published.

6. The transactions described in the PwC report took place in 1996-97. As was noted in the March 14 News Brief, since August 1998 a number of actions have been taken to correct the situation. These include unwinding all transactions that rendered reserves illiquid, conducting quarterly audits of the reserve position of the NBU and, more generally, improving the NBU's reserve management practices with the Fund's technical assistance.

7. The IMF Office of Internal Audit and Inspection (OIA) is conducting a review of the circumstances surrounding misreporting by Ukraine to the IMF from 1996 to 1998, to examine the timing and substance of what staff and management knew, whether and why the monitoring criteria failed adequately to take account of the transactions, and the decisions or judgements made by the authorities, staff, and management about investigating or reporting such transactions. The review should be completed in June.