The International Monetary Fund approved a $17-billion loan to Ukraine with an immediate disbursement of $3.2 billion to help the country pay its debts as separatist unrest threatens to split the nation’s east.
“This program does have risks,” IMF Managing Director Christine Lagarde said after a board meeting in Washington yesterday, citing geopolitical tension and potential difficulty following through on loan conditions. “Ukraine has an opportunity to seize the moment, to break away from previous practices, both from a fiscal, from a monetary and from a governance point of view.”
After twice freezing loans to Ukraine since 2008, the fund is banking on the interim government’s resolve to tackle unpopular measures such as the phasing out of natural-gas subsidies. IMF approval clears the way for additional aid from the European Union and the U.S. just as they widen sanctions against Russia for its actions in Ukraine.
Ukrainian Deputy Finance Minister Vitaliy Lisovenko in an interview last week said the loan will help turn around investors’ sentiment over a shrinking economy and may enable a return to international debt markets later this year. The government has to meet $9 billion in foreign-currency debt payments due this year, he said.
“Showing unprecedented resolve, the authorities have developed a bold economic program to secure macroeconomic and financial stability and address long-standing imbalances and structural weaknesses to lay a firm foundation for high and sustainable growth,” Lagarde said in an e-mailed statement.
The IMF predicts Ukraine’s economy will contract 5 percent this year before rebounding with growth of 2 percent in 2015, and expansion of 4 percent to 4.5 percent in the medium term.
In exchange for the loan, Ukraine committed to maintaining a flexible exchange rate and focusing monetary policy on domestic price stability, with plans to adopt inflation targeting by mid-2015, Lagarde said.
The hryvnia has lost 29 percent against the dollar this year, the most among more than 150 global currencies tracked by Bloomberg. The central bank halted its defense of the hryvnia so as not to burn through reserves.
Ukraine’s benchmark Eurobonds in April posted the biggest monthly slump since they were issued a year ago amid a deadly conflict between the government and pro-Russian separatists following the March annexation of Ukraine’s Crimea region by President Vladimir Putin.
In the worst confrontation with the U.S. and its European allies since the Cold War, Russia has started military exercises on Ukraine’s border, where the North Atlantic Treaty Organization says Putin is massing about 40,000 troops in battle readiness. The U.S. and EU say Russia hasn’t lived up to an accord signed April 17 in Geneva intended to defuse the situation.
“It would be difficult enough for a former Soviet state like Ukraine with a history of shirking reforms to implement an ambitious IMF-backed adjustment program under stable political conditions,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “Doing this when the country is being torn apart and Russia is hell-bent on undermining and discrediting the government is nigh impossible.”
Other policies in the package include a reduction of the budget deficit to about 3 percent of gross domestic product by 2016.
Ukraine’s fiscal woes have been worsened by subsidies to state-run energy company NAK Naftogaz Ukrainy.
“The objective to bring Naftogaz’s deficit to zero by 2018 will be accomplished by policies to raise its revenue and reduce costs,” the IMF said in a statement. “To this end, gradual, but meaningful and broad-based increases in the very low gas and heating retail tariffs will be accompanied by enhanced social assistance measures to mitigate the impact on the poorest.”
Part of the IMF money will help Ukraine settle $2.2 billion in back payments to Russian state-controlled OAO Gazprom for natural gas and pay for future imports. Gazprom said it will ask Ukraine to pay $485 per 1,000 cubic meters in the second quarter, more than the European market price.
“Whether it’s a question of the future price of gas or the payment of arrears for instance, we very much hope the parties will find an agreement shortly, and the program is actually financed to that effect,” Lagarde said.
The Ukrainian government in recent weeks passed several measures to show its commitment to the conditions, including laws to improve state procurement transparency and to raise utility prices.
The IMF has also consulted with major candidates in the May 25 presidential elections to gain their support and ensure the pace of change continues. Lagarde yesterday said adherence to the agreed-upon measures will be reviewed every two months at first.
The IMF’s approval “marks a crucial milestone for Ukraine,” U.S. Treasury Secretary Jacob J. Lew said in a statement, adding that the U.S. “will continue to impose increasing costs on Russia if it persists in its efforts to destabilize Ukraine.”
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