Crisis Still Grips Ukraine Amid IMF Jitters

KIEV, Ukraine -- One year after the economic crisis plunged Ukraine into one of Europe's deepest slowdowns, the country's economy remains fragile amid fears the IMF may suspend billions of dollars in credit.

Indicators have emerged of a gradual improvement in the economy.

The International Monetary Fund may not release the next tranche of its pledged 16.4-billion-dollar (11.2-billion-euro) loan to Ukraine due to fears over the government's control of the budget deficit and inflation, analysts and officials say.

"There is a considerable risk that the release of the new tranche could be delayed until the start of 2010," said Mykyta Mikhailichenko, an economist at Concorde Capital, an investment fund in Kiev.

Ukraine, one of world's hardest-hit countries by the crisis, was the first country to get IMF help last year, a shocking setback for an economy that had enjoyed strong growth of around 7.0 percent per year from 2000 to 2007.

The economy ministry is now forecasting a contraction in Gross Domestic Product (GDP) of 10-12 percent in 2009 after a dramatic fall of over 20 percent in the first quarter.

So far the Washington-based IMF has released three tranches worth a total of 10.6 billion dollars.

But the release of the next tranche of 3.8 billion dollars, due in November, is uncertain because the government has been dragging its feet in implementing unpopular measures demanded by the Fund.

In particular, the government has been reluctant to raise prices for natural gas and electricity, moves that would be politically risky ahead of presidential elections set for January 2010, Mikhailichenko said.

The IMF is also unhappy about a bill under consideration that calls for 1.15 billion dollars to be spent on preparations for the Euro-2012 football tournament.

"If the authorities conduct the policy that leads to inflation and undermines stability of (the) banking and financial system, we cannot support that," the IMF's top representative in Ukraine, Max Alier, said in an interview with the Kontrakty business weekly.

"We are prepared to provide assistance to Ukraine and be partners of Ukraine in successfully overcoming the crises, but we are not prepared to support a policy that deepens the economic crisis."

Ukraine's government submitted a draft budget for 2010 last Tuesday that was based on a deficit equal to just under 4.0 percent of total economic output, in line with IMF demands.

But the opposition Regions Party criticised the document as unrealistic and the Moscow-based investment bank Renaissance Capital said it was based on a "rather optimistic" economic forecast.

Officials close to Ukrainian President Viktor Yushchenko have expressed doubt about the IMF's continued support.

"I believe they won't give anything else," the deputy head of Yushchenko's administration, Olexander Shlapak, said last week.

Yushchenko is expected to run in the January 2010 election, as is his bitter political arch-rival, Prime Minister Yulia Tymoshenko.

If the IMF halts its support, "Ukraine would find itself in a difficult situation, without money, with a collapsed currency ... and a paralysed economy," the business weekly Investgazeta wrote.

"The suspension of cooperation with the IMF is a great danger, above all for the financial sector," said Olena Belan, an analyst with the Ukrainian investment fund Dragon Capital.

An IMF cutoff could push the government into a "considerable monetary emission" to cover its deficit, Belan said.

That would further weaken Ukraine's currency, the hryvnia, after it lost over 40 percent of its value against the dollar in the past year.

Others warn that the end of IMF support would tarnish Ukraine's image abroad.

"This is a very negative signal in the eyes of investors," said Dmytro Boyarchuk, head of CASE Ukraine, an economics research centre in Kiev.

"Nobody will want to work with a country that the IMF does not want to cooperate with anymore."

But indicators have emerged of a gradual improvement in the economy with, activity picking up in the crucial metals sector where production rose 15.3 percent in July from the month earlier.

"We think that Ukraine has hit the bottom," Renaissance Capital said in its latest report on the Ukrainian economy, saying there was now "macroeconomic evidence of a real economy recovery, at a basic level."

With the economy contracting by 18 percent year-on-year in the second quarter compared with a 20.3 percent fall in the first quarter, Ukraine recorded quarter-on-quarter GDP growth in the April-June period.

Source: AFP

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