KIEV, Ukraine -- The IMF, leaving Ukraine with a promise it would return to talks on a $15 billion loan, warned Kiev it faced a second year of near-zero growth and was vulnerable to further shocks due to its high current account deficit.

IMF's Christopher Jarvis

Rounding off a two-week visit to the former Soviet republic, the IMF mission said it would return in March to continue talks with the government on a new stand-by agreement to replace that which lapsed in December.

Kiev has been in negotiation with the delegation since Jan. 29 on a new deal to help it service foreign debt repayments set to peak at about $9 billion this year.

Money owed by Ukraine to the IMF itself accounts for about two-thirds of that sum.

Before the IMF mission left the Ukrainian capital for home its chief, Christopher Jarvis, issued a stark warning that Ukraine faced "serious challenges" in the year ahead.

"In the absence of corrective policies our forecast for 2013 is growth of 0-1 percent and a high current account deficit that leaves Ukraine vulnerable to shocks," he said in a statement.

"With better policies Ukraine can achieve better outcomes ... We expect the mission to return to Kiev in March to continue the discussions," he said.

Harking back to a deal-breaker in the past - the Kiev government's refusal to raise gas prices in the home - Jarvis said:

"Large subsidies on gas and heating for households continue to undermine Ukraine's budget and its balance of payments."

Ukraine has, to date, signed seven loan deals with the Fund.

But the last one, which was also for $15 billion, was suspended in early 2011 part way through when President Viktor Yanukovich's government refused to make ordinary Ukrainians pay more of the real cost of the gas it buys from Russia. 

Ukrainians officials gave no indication of what concessions the Kiev government might now - after a first round of talks - be ready to make to come to terms with the Washington-based Fund, one of its biggest foreign lenders. 


Ukrainian officials said the sides had given themselves more time for negotiations. 

"The (IMF) mission will carry out technical work in Washington and prepare the next round of talks," Vitaly Lukyanenko, a spokesman for prime minister Mykola Azarov, said.

"The mission is studying Ukraine's fiscal, exchange rate, monetary and energy policies," he said.

Asked whether a memorandum on a new loan deal had been drafted, Lukyanenko said:

"We are not at that stage yet."

Separately, Economy Minister Ihor Prasolov told reporters he expected another "technical" IMF mission to visit Kiev soon, followed by a third mission which would be ready to finalise the loan talks.

"The (third) mission will arrive, maybe in the second half of March, in late March, and we, on both sides, will be more prepared to move towards drafting a memorandum and we will prepare for its signing," Prasolov said.

Though the IMF is clearly continuing to press for an adjustment to utility prices under any new agreement, the government well knows that such a step will significantly deepen its unpopularity at home.

Ukraine's budget deficit doubled last year to $6.7 billion or 3.8 percent of gross domestic product as the government of Prime Minister Mykola Azarov boosted spending in the run-up to the October parliamentary election.

The Fund has also argued the Ukrainian hryvnia, pegged at about 8 per dollar since early 2010, is overvalued and called for Kiev to allow greater exchange rate flexibility.

Source: Yahoo News