IMF Will Lend $15.2 Billion If Leaders Hike Gas Prices, Raise Pension Age

KIEV, Ukraine -- Government will stick to painful loan conditions despite intense criticism. The tough fiscal medicine required to secure a $15.2 billion loan agreement with the International Monetary Fund is proving too much for some critics.

But the government defended the deal by saying the money is needed to avoid bankruptcy and keep the nation’s precarious economy afloat.

A detailed IMF memorandum, published on Aug. 6, outlines the belt-tightening steps that Ukraine is required to take to secure the credit.

The headline overhauls are unpopular natural gas price hikes for consumers and retirement age increases. Gas prices for households will rise 50 percent on April 1, on top of the 50 percent increase that took effect on Aug. 1, and will continue rising until they reach the import price.

The retirement age for women will rise by six months per year for 10 years, eventually reaching 60.

In a statement on Aug. 10, the cabinet of ministers said the agreement will “help repair the financial system, ensure a stable hryvnia, increase the country’s investment attractiveness and return the trust of the international community.”

The cabinet said the increase in pension age was “in line with global practice” and that aid would be provided to pensioners and the needy so that they were not hit by the gas price hikes.

‘No choice’

The most vocal proponent of the agreement has been Deputy Prime Minister Sergiy Tigipko, Ukraine’s point man for the IMF and head of the Strong Ukraine party, a rival with President Viktor Yanukovych’s ruling Party of Regions.

Brushing aside a possible backlash that may come from voters during an Oct. 31 election for local offices, Tigipko said on Aug. 10 that he would take responsibility for unpopular measures essential for the nation’s long-term fiscal health.

“I am not afraid of taking the blame,” Tigipko, who came in third in the Jan. 17 first round of Ukraine’s presidential election, said. “I do not fear responsibility. We have no choice.”

Tigipko said that, if Ukraine backtracked from its commitments to the IMF as it did during prior loans in 2004 and 2008, “who will continue to take us seriously as a state?”

The IMF demands pension changes, effective in 2011. The first IMF review of the program will take place at the end of September, with the second loan tranche of $1.5 billion to be disbursed by Nov. 30, if approved.


Some members of the pro-presidential Regions Party, such as lawmaker Vasyl Khara, vowed that Ukraine would not adhere to the tough IMF conditions, starting with the pension age increase.

“The president is himself against this. I am convinced we will not abide by this point,” Khara said. But senior members of the Regions Party brushed aside such claims as populism and insisted that the government would stick with the program.

But Petro Symonenko, leader of the Communist Party that is part of Yanukovych’s governing coalition, called for a national referendum on cooperation with international lenders.

Former Prime Minister Yulia Tymoshenko – who lost the Feb. 7 final round of the presidential election -- accused Yanukovych of raising the price of gas to line his backers’ pockets at the expense of the population.

She said the extra funds would be used to pay off controversial natural gas trader RosUkrEnergo, 45 percent owned by reputed Yanukovych supporter Dmytro Firtash.

The company won a decision in June in the Stockholm Arbitration Court ordering state energy company Naftogaz to transfer billions of dollars worth of gas, some 12 billion cubic meters, confiscated by Tymoshenko while she ran the government.

Opinion polls show people are reacting negatively to the proposed changes.

Nearly 37 percent of Ukrainians say the Aug. 1 gas price hike is being done for personal enrichment of vested politicians and business leaders, according to a poll conducted by the Horshenin Institute July 17-18.

According to a poll carried out by TNS-Ukraine on July 7, 93 percent of respondents said they were against any increase in the pension age.

Commitment strong?

For all Tigipko’s assurances, the IMF points out in the memorandum that Ukraine’s previous two agreements with the IMF -- in 2004 and 2008 -- both quickly went off track, raising doubts about the nation’s commitment to meet the terms of this third agreement.

This time round, the IMF agreement spaces the loan payments out into 10 small chunks over time, ending in December 2012, conditioning receipt of each successive tranche on meeting obligations.

According to Oleksiy Blinov, analyst at Astrum Capital, there is a possibility that the government will backtrack after Ukraine receives the money needed to cover its budget deficit this year. In 2011, Ukraine will receive no further budgetary support from the IMF, with money instead going to the National Bank of Ukraine as reserves.

“The role of the IMF as a key economic policy actor should diminish by that time, as the government will have received all the budget-directed money from it, so its commitment to follow the standby arrangement persistently should also correspondingly diminish,” Blinov said.

Oleksandr Zholud, senior analyst at Kyiv’s International Center of Policy Studies, said the IMF would likely delay or block disbursements if the most important conditions weren’t met.

“Certain things are crucial,” said Zholud, “particularly the second increase in the price of gas for the population [due April 2011], the pension reform and increase in pension age for women.”

Zholud said that the size of the budget deficit -- due to drop to 3.5 percent of gross domestic product in 2011 -- may be negotiable.

Ihor Burakovsky, head of the Institute for Economic Research and Policy Consulting, dismissed the idea that Ukraine could do without IMF support in 2011 as a fantasy.

“IMF funds alone are currently keeping the state roughly functioning, since they go towards supporting currency stability and financing the budget deficit,” Burakovsky said. “It will be very hard to normalize the situation over a month or half a year.”

Source: Kyiv Post