Saturday, November 15, 2008

Struggling Ukraine Braces For Tough IMF Medicine

KIEV, Ukraine -- The global economic crisis has hit with hurricane force in Ukraine, which faces turmoil as it seeks to comply with the terms of an emergency loan from the International Monetary Fund, experts said.

Ceyla Pazarbasioglu (L), IMF mission chief for Ukraine, shakes hands with Ukraine President Viktor Yushchenko.

As world leaders head to Washington for a summit on the crisis this weekend, Ukraine has the dubious distinction of being the first country to get IMF help this year, having been approved for a 16.4-billion-dollar loan last week.

Ukraine received the first tranche of the rescue loan Monday, boosting state efforts to prop up banks amid a broad downturn, largely caused by a drop in the price of steel, the key export of this ex-Soviet republic of 46 million people.

The Washington-based fund offered assistance once Kiev adopted a package of measures including "a prudent fiscal stance," Ceyla Pazarbasioglu, IMF mission chief for Ukraine, told reporters after the loan was approved.

Those steps included a bank rescue programme, a zero-deficit budget for 2009 and movement towards "a flexible exchange rate" for the hryvnia, Ukraine's embattled currency.

Some experts fear that could lead to a further devaluation after the hryvnia fell about 20 percent against the dollar in recent weeks.

"The purchasing power of Ukrainian consumers in dollar and euro terms will become worse. Much worse," said Dmytro Boyarchuk, the head of CASE Ukraine, an economics research centre in Kiev.

Meanwhile, the balanced budget along with reduced tax revenues from the steel sector means the government will have trouble paying social benefits, Boyarchuk said.

"Next year we can expect many backlogs in the payment of pensions," he said.

And in a move likely to cause grumbling this winter, Pazarbasioglu said Kiev had pledged "to correct the pricing policies in the energy sector," meaning an end to subsidized heating bills.

Ukrainians face a 35 percent rise in their gas bills starting December 1, according to media reports.

All this is unwelcome at a time when mass layoffs are expected in Ukraine's industrial east, work is frozen at numerous construction sites and more than 20 banks have received help from Kiev's central bank to ease liquidity problems.

Experts described the IMF's terms as painful but necessary and argued that some measures were inevitable.

"The rise in gas fees would have happened anyway," said Ildar Gazizullin, an economist at the International Centre for Policy Studies in Kiev.

The IMF loan restored confidence in Ukraine and its conditions "will force the politicians to focus and work together," said Peter Vanhecke, chief executive of Renaissance Capital Ukraine, an investment bank.

"With the IMF you get an international stamp of approval for your country," Vanhecke said in an interview.

The decision to accept the IMF's tough medicine was a sharp turnaround for Ukrainian politicians, accustomed to handing out government largesse after years of rapid economic growth.

"Politicians will have to adjust their populist rhetoric and wean the populace off the idea that the government can guarantee social benefits when the money is lacking," the Kyiv Post, a weekly newspaper, said in an editorial.

Aside from the economic fallout, some also fear the crisis could undermine democracy in Ukraine, which faces an ongoing political crisis that may lead to snap parliamentary elections early next year.

Kiev's ruling pro-Western coalition collapsed in September amid feuding between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, former allies in the "Orange Revolution" of 2004.

"The economic crisis, as well the extended political crisis... have boosted society's desire for order, for the 'strong hand' model of government," said Volodymyr Fesenko, a political analyst at the Penta think tank in Kiev.

That may increase the appeal of neighbouring Russia, where former president Vladimir Putin embarked on an authoritarian path during his eight years in the Kremlin, Fesenko added.

"There is some demand for a Ukrainian Putin," he said. "But it's not clear whether there is such a person."

Source: AFP

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