By Lesley Wroughton and Sabina Zawadzki
November 6 2008
The International Monetary Fund approved a $16.5 billion (10.4 billion pound) loan program for Ukraine that includes monetary and exchange rate policy shifts to ease strains from the global financial crisis.
The IMF, in a statement issued late Wednesday, said it would immediately disburse $4.5 billion to the government under the two-year loan agreement.
“The authorities’ program is designed to help stabilise the domestic financial system against a backdrop of global deleveraging and a domestic crisis of confidence, and to facilitate adjustment of the economy to a large terms-of-trade shock,” the Fund said.
“The authorities’ plan incorporates monetary and exchange rate policy shifts, banking recapitalization, and fiscal and incomes policy adjustments.”
In Kiev, President Viktor Yushchenko welcomed the decision, taken after Ukraine’s fractious parliament approved enabling legislation. He said it provided a “signal to the international community to boost the rating of trust in our country.”
“The economy is getting a powerful resource to develop priority sectors and guarantee the liquidity of the banking system,” he said in a statement on the presidential Web site.
Prime Minister Yulia Tymoshenko, the president’s former ally turned rival, described the loan as a “great victory” and said it would “allow us to stabilise completely the financial situation in Ukraine.”
The IMF decision was issued along with forecast indicators predicting that Ukraine would sink into recession next year, with a 3 percent fall against 6 percent growth this year.
In a statement, Murilo Portugal, IMF deputy managing director, said Ukraine’s economy, especially its banking system, was under severe stress, caused by a drop in global steel prices, the country’s main export, and global financial turmoil.
He said Ukraine’s program would seek to restore financial and economic stability through a more flexible exchange rate regime with targeted interventions, so-called ‘pre-emptive’ recapitalisation of banks, and tighter monetary policy.
“The flexible exchange rate regime, backed by an appropriate monetary policy and foreign exchange intervention, will help absorb external shocks and avoid disorderly exchange market developments,” Portugal said.
“The recent unification of official and market exchange rates should increase clarity about the regime.”
Exchange controls recently imposed, he said, would be phased out as confidence returns to the economy.
Ukraine’s central bank has been intervening since early October to lift the hryvnia currency from record lows last week. It began offering buy-sell rates for currencies this week after previously only selling or buying a currency.
Portugal said as credit pressures abate, tighter monetary policy will be needed to guard against inflation.
He said the government’s target of a balanced 2009 budget would be reviewed, although it could be achieved through expenditure restraint and a phased increase in energy tariffs.
Portugal said recapitalisation efforts for banks would ease liquidity pressures that could prolong an economic downturn.
“Decisive measures that have been taken to allocate public funds to recapitalise banks and to facilitate bank resolution processes will ensure that problems can be dealt with promptly,” he said.
“A proactive strategy to resolve corporate and household debt problems will also be essential to reduce banking sector vulnerabilities.”
(Editing by Andy Bruce)
Key facts on Ukraine’s finances and politics
The International Monetary Fund approved a $16.5 billion (10.5 billion pound) loan programme for Ukraine late on Wednesday that includes monetary and exchange rate policy shifts to ease strains from the global financial crisis.
Following are key facts about why Ukraine is vulnerable to heightened risk aversion among international investors.
* Ukraine has been plagued by political turbulence since “Orange Revolution” protests in 2004 brought to power President Viktor Yushchenko and a team committed to moving closer to the West and joining NATO and the European Union.
Rows pitting Yushchenko against his former ally Yulia Tymoshenko, who twice served as his prime minister, undermined the “orange” camp and brought down governments.
Although the president dissolved parliament last month and called a December parliamentary election, he has since suspended that decree and a vote this year now seems unlikely.
* Upheaval — and trouble forming a stable ruling coalition — reflect Ukraine’s longstanding division into the nationalist west and centre, which looks to the EU and United States, and the Russian-speaking east and south, friendlier towards Moscow.
* Relations with Russia, bumpy throughout the post-Soviet period, have sunk to unprecedented lows over Yushchenko’s denunciation of Moscow’s military intervention in Georgia. Ukraine depends heavily on Moscow for energy supplies.
* The hryvnia currency hit an all-time low of 7.2 to the dollar on October 29, weakened by growing global risk aversion and regional tensions after Russia’s conflict with Georgia.
* Authorities have said they will formulate a new mechanism which would unify the market, cash and official rates.
* In mid-2008, the hryvnia had strengthened as far as 4.5/$, after the central bank abandoned a policy of keeping it in a corridor of 5.00-5.06 per dollar within a 4.95-5.25 band.
* Foreign exchange reserves fell to $33 billion at the end of October from $37.5 billion end-September, when they covered 3.7 months of imports.
* The current account deficit more than quadrupled in the first nine months of this year compared with the same period last year to $8.4 billion, or 5.8 percent of GDP.
* Analysts based outside Ukraine forecast its current account deficit at $21-25 billion, or 10-12 percent of gross domestic product, by year-end; Ukraine-based analysts give lower forecasts of about 6 percent of GDP.
* Prices for Ukraine’s steel exports are dropping, while Russia’s Gazprom has suggested next year’s price for gas imports could soar to $400 per 1,000 cubic metres from $179.50 now.
* The central bank risks encouraging imports and further widening the trade gap if it supports the hryvnia. However, letting it float would remove an important anchor for domestic and foreign businesses in Ukraine’s export-driven economy.
* Many people hold debt in foreign currency and would have to pay more to service it if the hryvnia weakened.
* Consumers are extremely sensitive to currency movements — they lost savings when the Soviet Union collapsed and again through hyper inflation and a currency crisis in the 1990s that more than halved the hryvnia’s value to about 4/$ and beyond.
* Ukraine was forced to restructure its debts in 2000 and made the final payments on that restructuring just last year.
Ukraine’s foreign debt totalled just over $100 billion as of July 1, of which about $15 billion was government debt.
* Analysts estimate Ukraine’s 2009 external financing requirement to be $55-66 billion, of which $32-40 billion is in the private sector. Foreign banks own 40-42 percent of total banking assets and 25 percent of short-term banking debt is owed to parent banks.
(Compiled by Sabina Zawadzki)