Ukraine’s Bailout Loan Depends on Policy, IMF Says

By Daryna Krasnolutska

Oct. 26 (Bloomberg) -- Ukraine’s government must endorse a package of policy steps and veto a wage and pension law approved by lawmakers before it gets the fourth chunk of a $16.4 billion bailout loan, the International Monetary Fund said.

The eastern European nation was due to receive $3.4 billion after a mission from the Washington-based fund arrived in Kiev on Oct. 12 to review implementation of economic reforms.

The IMF is demanding an “agreed policy package, including assurances that the wage and pension law approved by Ukraine’s parliament, which is at odds with the objectives of the authorities’ program, will be vetoed,” the fund said in an e- mailed statement yesterday.

Ukraine is relying on the loan, approved in November, to stay afloat after the global recession and credit crisis undermined demand for exports such as steel and hammered its banking industry. The IMF program was suspended for three months this year because of government disputes over state spending.

“Ukraine is interested in getting the IMF money as soon as possible as part of it is likely to be used to cover the state budget gap,” said Olena Bilan, an analyst at Kiev-based investment bank Dragon Capital. “I think it may take between two to three weeks for Ukraine to solve the issue.”

Failure to Comply

The loan program was renewed in May after Prime Minister Yulia Timoshenko pledged to narrow the state budget deficit. The country has received $10.6 billion in loan payments to date.

Ukraine’s 7.65 percent bond maturing in 2013 fell to 90.230 as of 10:15 a.m. in Kiev from 90.437 on Oct. 23 and its yield rose to 10.990 from 10.912, data compiled by Bloomberg show.

Ukraine has failed to comply with the loan’s terms, including raising natural gas prices for households and adopting laws needed to stabilize the financial system. At the same time, Ukraine’s parliament approved a law on Oct. 20 increasing social payments, including the minimum wage, in an effort to win voter support ahead of Jan. 17 general elections.

The IMF said in July that reducing the budget deficit would be key to releasing the next tranche. The government will run a budget gap equivalent to 8.6 percent of gross domestic product this year, the IMF estimates. That figure excludes the cost of rebuilding the financial industry.

“The mission found that the economic and financial situation in Ukraine is stabilizing as a result of policies under this program,” the IMF said yesterday. “Preserving these gains will require policy discipline and corrective actions in some areas.”

Wage, Pension Law

Timoshenko said on Oct. 21 she would ask President Viktor Yushchenko to veto the wage law adopted by the parliament as it “undermines the budget and fuels inflation.”

Yushchenko’s economic aide Roman Zhukovskyi declined to comment when asked whether the president will veto the law when called on his mobile phone today.

The economy contracted an annual 17.8 percent in the second quarter, after shrinking 20.3 percent in the three months through March.

Yushchenko and Timoshenko have clashed over fiscal policy. The president has criticized the government running a “huge” budget gap, while the opposition has blocked the passage of legislation through parliament until its demands for higher social spending are met.

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net;