Ukraine will use $2 billion out of its new $15 billion IMF facility to finance its budget deficit this year and will stick to tight fiscal targets imposed by the deal, government officials said on Thursday.
The cash-strapped former Soviet republic expects to receive the first $1.89 billion disbursement under the deal within a few days, Deputy Prime Minister Sergei Tigipko’s office said in a statement. The second tranche is expected in late December.
The IMF board on Wednesday finalised a new $15 billion loan agreement negotiated with Ukraine’s new government that requires it to tighten public finances.
Ukraine will use part of this year’s disbursements to finance its budget deficit and spend the rest on boosting central bank reserves, the deputy prime minister said.
"According to the terms of the cooperation programme, Ukraine will get $2 billion to cover the 2010 budget deficit but starting from next year all funds will be used only to replenish central bank reserves," Tigipko said.
The IMF deal requires Ukraine to keep its budget deficit within 5.5 percent of gross domestic product this year and cut it to 3.5 percent of GDP next year using unpopular measures such as increasing gas tariffs and raising the retirement age.
The IMF suspended Ukraine’s previous $16.4 billion facility last year after the previous government reneged on fiscal constraint pledges.
STRICTER POSITION
"Ukraine, under the previous IMF programme, always had difficulties meeting the key performance criteria and had to ask for waivers," Renaissance Capital brokerage said in a note on Thursday.
"Currently, the IMF’s position seems to be stricter, as Ukraine had to meet the most arguable requirements as prerequisites for the programme’s approval."
The government has already announced a 50 percent hike in gas prices for households from Aug. 1 and related adjustments to other utility fees. But even that may not be enough, Renaissance Capital said.
"We think the main challenge for the Ukrainian government before the next IMF review (expected in November 2010) will be to keep the budget deficit in line with the plan."
Ukraine’s government said in a separate statement it would stick to agreed targets.
"Ukraine will … diligently meet all the obligations it has taken on," the government said.
Athanasios Arvanitis, the head of IMF mission to Ukraine, told a conference call on Thursday that while the August gas price hike would be sufficient for this year, further adjustments would be necessary in the future.
"Gas tariffs will need to continue to increase," he said.
MORE INVESTOR APPETITE
Ukrainian debt valuations have already improved significantly since the preliminary IMF deal was announced in early July but analysts say the fund’s final decision has further boosted investor confidence.
"Sovereign spreads have room to tighten now … and many corporate names are punished by higher sovereign spreads," Oleg Larichev, Managing Director of Troika Dialog Asset Management told Reuters Insider TV.
Analysts say the IMF deal also strengthens the case for hryvnia revaluation by supporting the balance of payments and pushing Ukraine’s central bank towards allowing more appreciation.
"We believe that Ukraine, given the structure of its economy … is best served by having a flexible exchange rate policy," Arvanitis said.
"We believe that the central bank should focus its efforts towards establishing a low inflation environment." (Writing by Olzhas Auyezov, editing by Andrew Heavens)
