Ukraine-IMF talks drag on over budget deficit target
A Ukrainian government delegation will travel to Washington in the coming days to continue talks with the International Monetary Fund over unfreezing a $16.5 billion lending program after 10-day negotiations with a fund mission in Kyiv failed to remove all hurdles, especially the disagreement over budget deficit targets. The IMF reportedly insists on capping the government deficit at 6 percent of gross domestic product (about Hr 8 billion), including deficits of the central budget, the Pension Fund and oil and gas monopoly Naftogaz Ukraine. However, domestic authorities see the deficit ceiling at 10 percent of GDP (Hr 13.5 billion), First Deputy Head of Presidential Administration Iryna Akimova said. In separate comments, Akimova said Ukraine was also going to ask the IMF to approve a new two-year lending program after the current facility is used up. Ukraine can still draw $6 billion from the IMF under the outstanding program.
Public debt rises to $37.9 billion
Ukraine’s public debt (foreign and domestic) rose 0.7 percent to $37.9 billion by the end of February, equaling 29 percent of the country’s GDP. The government’s external liabilities continued to decline in February, inching down 1 percent to $24 billion, as no new borrowings were attracted while repayments on outstanding loans continued. Domestic debt, however, rose further as the Finance Ministry placed Hr 4 billion of Treasury bonds over the period to finance the budget deficit and roll over debt falling due. Debt to the International Monetary Fund, totaling $11 billion, accounted for more than 40 percent of the state’s foreign debt obligations and almost a third of total debt as of the end of February. Analyst expect no major changes in Ukrainian public debt stock until the government completes talks with the IMF to recommence its lending program. After that, the government is expected to start borrowing actively, from both the IMF and other foreign lenders, to close the budget gap. Factoring in the state’s estimated financing needs, its total debt may increase to $53 billion by the end of 2010, or 38 percent of GDP.
Government OKs key 2010 indicators
The government approved key macroeconomic indicators to be used for drafting the state budget for 2010, projecting real gross domestic product growth of 3.7 percent, inflation of 13.1 percent and an average exchange rate of Hr 8/$1. These forecasts fall generally in line with independent analysts’ estimates. More importantly, the government looks ready to contain growth in welfare spending this year to stop the budget deficit rising. According to provisional information, the new budget draft envisages a monthly minimum wage of Hr 888 at the end of 2010, which is below Hr 922 stipulated by the controversial social payments law that caused the IMF to suspend its lending program for Ukraine last November.
Current account posts small deficit in February
Ukraine’s current account ran a $36m deficit in February after posting a $228m surplus in January. The deterioration was caused by a smaller service trade surplus, which was affected by lower gas transit volumes and by a widening income deficit, the latter stemming from increased interest payments on foreign debt. At the same time, the merchandise trade deficit remained virtually unchanged over the period at $300 million, with exports totaling $3.5 billion and imports $3.8 billion. The latest current account data indicate no material changes in Ukraine’s external trade flows and fall generally in line with analyst expectations.
NBU seeks to curb hot money inflows
The National Bank of Ukraine is going to restrict inflows of foreign capital by requiring that local banks block 30 percent of short-term funds attracted from foreign investors, NBU Deputy Governor Anatoliy Shapovalov said. The statement followed a recent surge in demand for government Treasury bonds from foreign investors. Attracted by high yields, foreigners have bought more than Hr 1 billion worth of Treasuries so far this year, and a lot of foreign demand remains unsatisfied. While increased foreign investments have allowed the hryvnia to appreciate in recent weeks, to Hr 7.92:USD as of March 30, the NBU is worried the national currency may come under strong depreciation pressure should foreign investors’ sentiment change for the worse and they start rapidly withdrawing their money. In addition, the prospective NBU regulation is intended to make it less profitable for domestic banks to finance risky asset expansion using short-term loans or deposits from abroad.
