November 30, 2012 5:53 pm

Ukraine requests fresh IMF bailout loan

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Ukraine, with its economy sliding into recession and budget deficit widening, has appealed to the International Monetary Fund to initiate negotiations on a fresh, multibillion-dollar bailout loan programme.

A mission from the IMF headed by Christopher Jarvis is scheduled to arrive in Kiev on December 7 to initiate negotiations for a new “standby” agreement, according to a statement issued late on Friday.

Earlier on Friday, Prime Minister Mykola Azarov announced that his government had asked the IMF to resume talks on a fresh loan agreement.

Ukraine’s economic growth and hard currency earnings from exports are highly vulnerable to global shocks, particularly demand and prices for steel, the country’s top export.

After contracting 15 per cent during the 2009 global recession, billions of dollars in IMF loans helped stabilise Ukraine’s economy. But a $15bn bailout programme was frozen in 2011 amid lacklustre reform efforts.

Ukraine’s economy has partially bounced back, but third-quarter gross domestic product declined 1.3 per cent, in year-on-year terms. Experts expect fourth-quarter growth to remain negative due to weaker foreign demand, a domestic credit crunch and a lower grain harvest.

The hryvnia, Ukraine’s currency, has been under pressure in recent months. It fell to a three-year low relative to the US dollar in November, just after an October 28 parliamentary election whose fairness was questioned by international observers.

Separately, Ukraine’s finance ministry this week revealed that the country’s state budget gap widened almost threefold in the first 10 months of the year, reaching $4.1bn due to falling revenues and a 16 per cent pre-election spending spree by the government of President Viktor Yanukovich.

“Ukraine desperately needs fresh loans from the IMF to roll over about $10bn in external sovereign debt due next year, including $5.9bn owed to the IMF itself,” said Alexander Valchyshen, head of research at Kiev-based Investment Capital Ukraine.

Signs that Kiev is keen to revive a loan programme with the IMF should “shore up confidence for the country’s private sector market participants and to reduce the risk premium which is currently attached to local assets,” Mr Valchyshen added.

Ukraine’s default risk is the six highest of 93 countries tracked by Bloomberg.

“If the IMF nods to Kiev, then that risk premium may drop,” Mr Valchyshen said.

In return for loans, the IMF is expected to call upon Kiev to introduce a more flexible currency exchange rate, remove a costly peg of the hryvnia to the US dollar that has sharply drained central bank reserves in recent months and gradually eliminate unsustainable natural gas price subsidies for consumers.

“The immediate tasks are to consolidate fiscal adjustment, improve the monetary and exchange-rate policy framework, strengthen banks’ balance sheets and step up structural adjustment, especially in the energy sector,” IMF officials said earlier this week.

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