The International Monetary Fund has warned that it could cut financial assistance to Ukraine, one of the world’s most recession hit economies, after the country veered “off track” by adopting populist wage and pension increases.
The warning came after Viktor Yushchenko, Ukraine’s president, on Friday signed the increases into law, ignoring warnings from the IMF and Yulia Tymoshenko, his prime minister and bitter rival. The standoff is rooted in a rivalry between Ukraine’s political leaders ahead of a hotly contested presidential election to be held in January.
Dominique Strauss-Kahn, the IMF head, said he was “very worried” over Mr Yushchenko’s decision to sign the bill. Almost $11bn in IMF assistance received since the global financial crisis broke has kept Kiev afloat financially. The IMF is mulling whether to disburse an additional $3.8bn (€2.6bn, £2.3bn) in November. It is seen as crucial to keeping Kiev stable in coming months, but Mr Strauss-Kahn said the 20 per cent wage and pension increases should be cancelled first.
Kiev found its finances stretched to the limit this year amid an 18 per cent drop in gross domestic product. The increases would cost an additional $10bn in expenditures, which government officials say simply do not exist in state coffers.
Ms Tymoshenko has accused Mr Yushchenko and other presidential candidates, including Viktor Yanukovich, of backing the increase to sabotage her government. Ms Tymoshenko’s supporters said her opponents hope to derail IMF co-operation and plunge Ukraine deeper into crisis, thereby undercutting her presidential bid.
Ms Tymoshenko’s opponents have accused the IMF of being soft on her government in dolling out bailout aid despite lacklustre efforts to adopt reforms.
Fears loom that such cut-throat rivalries could plunge Ukraine, a country where European banks hold a 40 per cent market share and where the west has jostled with Russia for influence, into a financial meltdown ahead of the elections.
On Friday, Vladimir Putin, the Russian prime minister, warned that a repeat of last January’s natural gas crisis could break out between both countries, once again cutting off supplies for Europe. Mr Putin, himself on friendly terms with Ms Tymoshenko, pointed the blame on Mr Yushchenko. He accused him of “blocking the transfer of funds” needed to pay for imported Russian gas.
