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IMF to continue discussion on second review under SBA with Ukraine

October 25, 2011, 14:06 UTC+3

The International Monetary Fund (IMF) mission will arrive in Kiev on Tuesday to consider the issue of giving Ukraine the next tranche of financial assistance

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KIEV, October 25 (Itar-Tass) — The International Monetary Fund (IMF) mission will arrive in Kiev on Tuesday to consider the issue of giving Ukraine the next tranche of financial assistance, Resident Representative of the International Monetary Fund in Ukraine Max Alier told reporters.

“An International Monetary Fund mission will visit Ukraine during October 25-November 4 to continue the discussions on the second review under the Stand-By Arrangement (SBA) and the 2011 Article IV consultation,” Alier said.

The IMF mission was planning to visit Ukraine on August 29 - September 9, but postponed the visit until late October at the request of the Cabinet. The Fund explained that “the Ukrainian government requested additional time to implement key activities planned for the completion of the second review of the program.” The IMF names among the main measures the introduction of the pension reform, raising natural gas tariffs, as well as ensuring the fulfilment of fiscal targets for 2011 and 2012.

On the visit results the mission is supposed to recommend the IMF Board of Directors to complete the review of the programs on the stand-by arrangement and grant Ukraine another loan tranche. The Ukrainian government is planning by the year end to get two tranches worth $1.5 billion each. According to the Cabinet officials, the loans will be transferred to the reserves of the National Bank of Ukraine (NBU).

Deputy Prime Minister, Minister of Social Policy Sergei Tigipko earlier said that Ukraine has no other options but to negotiate with the International Monetary Fund. “We are facing a rather serious crisis. We have no options, we need to negotiate with the IMF, because it is very hard to be left one-on-one with the crisis without the support of international financial institutions,” he said. “We already have borrowed heavily and, second, we have no money.”

According to Tigipko, the IMF is concerned over the budget deficit of Naftogaz Ukrainy. “Ukraine needs to liquidate it, in particular, by raising gas prices for the population,” said Tigipko, adding that the IMF insists on this. The deputy prime minister added that “if we manage to negotiate gas price reduction with Russia, the gas prices for the Ukrainian population may not be increased.”

In early June, 2011 Prime Minister Nikolai Azarov said that as of today, Ukraine has no immediate need for IMF funds.

In July 2010, the IMF approved a program of financial assistance to Ukraine up to 2012 to the sum of about $16 billion. The program’s aim is the support by the Fund of the government program of reforming the Ukrainian economy. The program is to be in effect within 2.5 years. The loans are attracted at 3.5 percent annual interest rate. The SBA was approved on July 29, 2010 for SDR 10 billion (about US$16 billion) in support of the authorities’ economic adjustment and reform program.

Immediately after the approval of the cooperation program, Ukraine received the first tranche of IMF loan worth $1.89 billion. The IMF Board of Governors at a meeting on December 22, 2010 decided to provide to Ukraine the second tranche of the stand-by loan worth $1.5 billion. The Fund at the same time put forward a number of conditions to the Ukrainian government, including pension reform. One of the IMF requirements relates to the activities of the National Bank of Ukraine, in particular, the need to abolish the requirement of mandatory redemption of recapitalisation bonds, which according to the IMF, reduces the independence of the National Bank.

Executive Director of the Bleyzer Foundation Oleg Ustenko predicts that Ukraine can get the next IMF tranche by the end of the year. At the same time the economist said for getting funds this year Kiev has to demonstrate willingness to compromise. “Otherwise, the country will get the IMF loan only in February-March 2012,” believes Ustenko.

In his view, the current negotiations will be more complex than if they were held this spring or summer. “Today, given the ineffective agreements with Russia on gas price reductions, negotiations with the IMF will also be not easy,” the expert believes. “If Ukraine does not take an unpopular decision, including regarding the natural gas price rises for the population, it will be very difficult for it to manage without the next tranche, taking into account the financial crisis.”

According to the IMF, key objectives of the authorities’ program are to consolidate public finances, restore banking system soundness, and develop a more robust monetary policy framework. To help achieve this, the government will implement reforms and institutional changes, including tax and expenditure policies, pension and energy sector reforms, and measures to strengthen central bank independence and rehabilitate the banking system. Strict adherence to these policies will help deepen market access, facilitating exit from Fund financial support.

The economic reform program aims to support the authorities’ agenda in four key areas: Restore confidence and fiscal sustainability by reducing the general government deficit to 3.5 percent of GDP in 2011 and 2.5 percent in 2012 and setting public debt firmly on a downward path below 35 percent by 2015; Initiate reforms to modernize the gas sector and eliminate Naftogaz’s deficit starting from 2011, including through gas tariff increases and a price mechanism that depoliticises price setting of public utilities. A new gas law adopted in early July will improve efficiency through unbundling production, transit, and distribution to end-users, and allowing new entrants and investment into the domestic gas sector.

Ukraine joined the IMF as a member on September 3, 1992. Its quota is SDR 1,372 million (about US$2,078.4 million).

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