IMF offers Ukraine up to $18 billion in loans

Ukrainian Prime Minister Arseniy Yatsenyuk, speaks to lawmakers during a session at the Ukrainian parliament in Kiev, Ukraine, Thursday, March. 27, 2014. (AP Photo/Sergei Chuzavkov)
March 27, 2014 7:37:42 AM PDT
The International Monetary Fund pledged up to $18 billion in loans on Thursday to prop up Ukraine's teetering economy, and the prime minister warned that everyone is going to feel some pain from the necessary financial reforms ahead.

Former Ukrainian prime minister Yulia Tymoshenko, meanwhile, announced that she will run for president in the vote set for May 25. Tymoshenko, who was released from jail last month following the overthrow of President Viktor Yanukovych, returns as one of the most polarizing figures in Ukraine's political scene.

In a lengthy, passionate address to parliament, Prime Minister Arseniy Yatsenyuk warned that Ukraine was "on the brink of economic and financial bankruptcy" and laid out the fixes needed to put the country back on track.

"The time has come to tell the truth, to do difficult and unpopular things," Yatsenyuk said. "The country is short 289 billion hryvnia ($25.8 billion), which is practically equivalent to the entire state budget for this year."

The IMF loan, which is expected to range between $14 billion and $18 billion, hinges on structural reforms that Ukraine has pledged to undertake.

Ukraine's new government finds itself caught between the demands of international creditors and a restive population that has endured decades of economic stagnation, corruption and mismanagement. Those reforms - which included raising taxes, a freeze on the minimum wage and higher energy prices - will hit households hard and are likely to strain the interim government's tenuous hold on power.

Ukraine, a nation of 46 million people, is battling to instil some semblance of normalcy since Yanukovych was ousted in February after months of protests ignited by his decision to back away from closer relations with the EU in favor of deepening economic ties with Russia. Over the last few weeks, Ukraine has lost the Crimean Peninsula to annexation by Russia and is now bracing for a turbulent political season ahead of the May 25 presidential election.

"This is a kamikaze government that perfectly well understands that there is no other way to stabilize Ukraine," said Viktor Zamyatin, analyst with the Kiev-based Razumkov Center think tank. "The catastrophic state of Ukraine's economy has forced the government's hand."

Tymoshenko, who is variously admired as an icon of democracy or detested as a self-promoting manipulator with a shady past, declared that she has earned the right to promise she will combat corruption.

This will be her second attempt to secure the presidency. She narrowly lost to Yanukovych in 2010 and spent two years in jail on charges that many in the West considered politically tainted.

"I will be the candidate of Ukrainian unity," Tymoshenko said Thursday. "The west and center of Ukraine has always voted for me, but I was born in the east."

The IMF said recent economic policies have drastically slowed Ukraine's growth and brought foreign currency reserves to a "critically low level."

"Ukraine's macroeconomic imbalances became unsustainable over the past year," the IMF said in a statement Thursday.

Reforms sought by the IMF include making the energy sector more profitable, maintaining a flexible exchange rate, slashing the deficit and combating widespread corruption.

Ukraine's Finance Ministry has said it needs $35 billion over the next two years to avoid default.

One immediate reform will be to allow gas prices for households to float upward to be more in line with market prices. Ukraine for years has relied on discounted gas from Russia and then subsidized that further, so that residents are used to extremely low energy prices. Russia has abandoned the discounts and Ukraine's government cannot afford the extra subsidy anymore.

Prices for gas and heating have to be raised "to full cost recovery," the IMF said.

State energy company Naftogaz announced this week that household gas prices would rise 50 percent beginning May 1 to make utility costs economically viable for the state by 2018. To ease some of that pain, Yatsenyuk said the number of households getting state energy subsidies would rise from 1.4 million to four million.

Yatsenyuk also announced layoffs for 10 percent of Ukraine's civil servants, or 24,000 workers.

Other donors, including the European Union and Japan, have already pledged further aid to Ukraine, conditional on the conclusion of an IMF bailout and reform package. The total amount of international assistance will be about $27 billion over the next two years.

Separately, the 28-nation EU has prepared a wider aid package including loans and grants for Ukraine expected to total more than $10 billion over the coming years.

Zamyatin, the analyst, said the economic reforms could cost Ukraine's still-shaky interim government dearly in political capital.

"It is hard to explain to the voter that the worsening of the economy has happened not because of the revolution, but because of Viktor Yanukovych's policies," he said.

Ukraine has historically had a fraught relationship with the IMF and failed to keep to the terms of earlier bailouts in 2008 and 2010. Such recalcitrance is seen as less probable this time around, although doubts may persist.

"Given the volatile political situation, the prospect of a change in president following elections on May 25, and Ukraine's track record with the IMF, there will still be many doubts about whether politicians will be able or willing to push through more substantial changes," William Jackson, an analyst at Capital Economics research company, wrote Thursday.

The White House welcomed the IMF loan announcement, calling it a "powerful sign of support from the international community for the Ukrainian government."

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Nataliya Vasilyeva in Moscow and Juergen Baetz in Brussels contributed to this report.


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