Ukraine Is ‘Fragile,’ Needs Consensus for Recovery, IMF Says

Ukrainian authorities need to reach a consensus to overcome the “lingering uncertainty” that threatens to derail economic recovery, an International Monetary Fund official said, according to Bloomberg.

Ukraine’s economy remains “highly fragile” and the 2010 budget draft would result in a deficit of 8 percent of gross domestic product, “far above” the terms of the country’s IMF program, Ceyla Pazarbasioglu, the IMF mission chief in Ukraine, said in an interview with IMF Survey magazine, distributed by e- mail yesterday.

Ukraine is relying on an IMF loan to stay afloat after the credit crisis undermined demand for its exports such as steel and left its financial sector stumbling. The country seeks to receive a $3.4 billion payment this month. The Washington-based lender wanted the president to veto a law increasing social benefits and alter “some policies” before that.

“Policies in some areas, including the submission of an expansionary 2010 budget and the new social standards law, threaten” previous gains in economic stability, Pazarbasioglu said. “There is serious disagreement among the authorities on how to proceed.”

The hryvnia closed at 8.25 per dollar yesterday in Kiev, from 8.215 on Nov. 3.

‘Difficult to Finance’

The economy contracted an annual 17.8 percent in the second quarter after shrinking 20.3 percent in the three months through March. A budget gap reaching 8 percent would be “difficult to finance” and would probably push up interest rates, she added.

The situation is aggravated by political fight between President Viktor Yuschenko and Prime Minister Yulia Timoshenko, who will compete in the Jan. 17 presidential elections. The opposition blocked the passage of legislation in September and October until its demands for higher social spending were met.

Ukraine’s IMF program was stopped in February and renewed in May after Timoshenko pledged to narrow the budget deficit. The country has received $10.6 billion in loans to date.

Ukraine has failed to comply with the loan’s terms, including raising natural gas prices for households and adopting laws needed to stabilize the financial system. Lawmakers increased spending on social benefits, including minimal wages, in an effort to win voter support ahead of Jan. 17 general elections.

The Washington-based lender urged Yushchenko to veto the bill on social benefits, which IMF Managing Director Dominique Strauss-Kahn said “threatens the economic stability.” The president signed it on Oct. 30.

“It is simply not possible to increase wages and pensions too rapidly without leading to higher unemployment or higher inflation,” Pazarbasioglu said. “If the social standards law is implemented as voted, it could cost as much as 7 percent of GDP in 2010, which is totally unsustainable. The country simply cannot afford this.”