Lacklustre GDP Data Push Ukraine Towards Fresh IMF Bailout

KIEV, Ukraine -- Ukraine’s economy contracted 1.1 per cent in the second quarter, year on year, according to government figures that add impetus to the government’s bid to seek further assistance from the International Monetary Fund.

Serhiy Arbuzov

Serhiy Arbuzov, first deputy prime minister, said on Tuesday his government was hoping for a fresh $15bn bailout and that he expected to sign “a long-term agreement” in the autumn, according to the state news agency Ukrinform.

The IMF’s multibillion-dollar bailouts kept Kiev afloat during and immediately after the 2009 recession, and with the outlook gloomy, officials say they are keen to revive long-stalled negotiations over a fresh injection of funds.

Ukraine’s economy is suffering less than during the dismal days of the 2009 global economic crisis, when gross domestic product plunged 15 per cent.

But the government is grappling with a rising budget deficit, shrinking central bank reserves and relatively high external debt liabilities – a volatile mix that experts say could boil over into a full-blown balance of payment crisis.

Wednesday’s figures showed that GDP contracted 0.4 per cent quarter-on-quarter in seasonally adjusted terms.

After slipping into recession in mid-2012, Ukraine posted 0.6 per cent GDP growth in the first quarter of 2013.

Ukraine’s economy remains highly vulnerable to external shocks.

Industrial production contracted 5.3 per cent in the first half of 2013 on weak demand for steel and other top exports.

While the agriculture sector performed well, its gains are unlikely to make up for industrial losses as it accounts for a smaller share of GDP.

The country’s $15bn IMF loan programme was frozen in 2011 amid lacklustre reform efforts.

Standing in the way of fresh IMF funds is Ukraine’s longstanding unwillingness to begin the painful process of reducing subsidies on household gas prices.

It is not clear whether officials are now ready to accept this as a condition for more funds.

But the need to shore up state finances and market confidence is becoming more urgent.

On Monday, the IMF revealed that it had initiated “post-programme monitoring” of Ukraine, citing $8bn in outstanding credit that had reached “383.8 per cent of quota,” beyond the 200 per cent quota threshold.

Bankers in Kiev say Ukraine’s currency, the hryvnia, is under pressure, and see the likelihood of a devaluation in the coming months as high.

“The slump in Ukrainian FX reserves to a six-year low serves as a reminder that Ukraine’s fragile external position continues to keep it one step away from a full-blown balance of payments crisis,” London-based Capital Economics said in a July note.

Source: ft