Ukraine to Get $14.8 Billion From IMF in Deal Conditional on Deficit Cuts
Ukrainian Prime Minister Mykola Azarov. Photographer: Alexey Druzhinin/AFP/Getty Images
Ukraine reached an agreement with the International Monetary Fund for a new $14.9 billion loan after the fund’s mission to the country approved economic policies aimed at reducing the budget deficit.
The Washington-based lender’s Executive Board will make a final decision by late July, the IMF said in an e-mailed statement today.
The agreement with Ukraine is for “an economic policy program that can be supported by a two-and-a-half year stand-by arrangement,” Thanos Arvanitis, the IMF’s mission chief for Ukraine, said in the statement. “The goal of the authorities’ economic program is to entrench fiscal and financial stability, advance structural reforms, and put Ukraine on a path of sustainable and balanced growth.”
Ukraine secured a two-year loan with the IMF at the end of 2008 after the global economic slowdown cut demand for steel, chemical products and machines. The former Soviet state has received $10.6 billion, which was used to cover the 2009 budget gap and make payments for Russian natural gas deliveries. Payments were frozen in November as the previous government failed to cut spending ahead of January presidential elections.
The IMF wants a consolidated budget deficit of 5.5 percent of gross domestic product this year and 3.5 percent of GDP in 2011. The Cabinet of Prime Minister Mykola Azarov initially aimed at a target of 5.3 percent of GDP plus 1 percent to cover funds for state-run energy company NAK Naftogaz Ukrainy.
Positive Signal
“The new program is a strong positive signal for investors,” said Olena Bilan, chief economist at Kiev-based investment bank Dragon Capital. “To keep the budget deficit at 5.5 percent is possible but it will require radical measures to contain spending growth or measures to boost revenues.”
The IMF Executive Board will approve the new program after Ukraine’s “approval of legislative changes relating to the budget and financial sector,” said Arvanitis. “The fiscal adjustment is to be achieved by tax and social security structural reforms, expenditure rationalization combined with efforts to improve tax administration.”
The lender also wants the government to ensure its banks are adequately capitalized and to carry out reforms in the energy sector. The IMF wants Ukraine to keep Naftogaz’s deficit at 1 percent of GDP in 2010 and balance its finances in 2011.
Ukraine will inject the IMF funds mainly into the central bank’s foreign currency reserves with some used for the deficit. The East European nation also received a loan of $2 billion from Russia’s VTB bank for the deficit, Azarov said last week.
Resumed cooperation with the IMF also opens the way for a European Commission loan estimated at 610 million euros ($755.8 million). It will also help lower the interest rate on Eurobonds that the government plans to sell this month, Deputy Prime Minister Serhiy Tigipko said on June 11.
Tigipko said in March Ukraine needs IMF support to boost its economy, which contracted 15.1 percent in 2009, the biggest drop since 1994. Gross domestic product expanded 4.9 percent in the first quarter, according to state statistics data.
To contact the reporters on this story: Kateryna Choursina in Kiev at kchoursina@bloomberg.net; Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net
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