IMF bails out Ukraine with a $16.5 billion loan

The International Monetary Fund said yesterday that it had arrived at a tentative agreement with Ukraine on a whopping $16.5 billion loan subject to certain legislative changes to Ukraine banking laws in order to restore the country's financial stability which was caused by a sharp decline in steel prices and 40 per cent fall in exports causing its currency, the hryvna to tumble sharply.

The loan comes after Iceland reached a tentative agreement with the fund on Friday for a $2 billion emergency loan to stabilize its economy. (See: IMF approves $2-billion loan for Iceland)

The tentative agreement of $16.5 billion loan by the IMF came just two days after Ukraine agreed to a key IMF condition to allow the official exchange rate for the hryvna to move closer to the market's exchange rate.

IMF's managing director, Dominique Strauss-Kahn said yesterday "An IMF staff mission and the Ukraine authorities have today reached agreement, subject to approval by IMF management and the executive board, on an economic program supported by a $16.5 billion loan under a 24-month stand-by arrangement.

"Consideration by the board would follow approval of legislative changes to Ukraine's bank resolution program," he added.

The IMF and the Ukrainian government issued a joint statement saying, "The support by the fund will promote an accelerated cooperation between Ukraine and other international financial organisations to strengthen the confidence of private investors and ensure stable operations of the banking system of Ukraine.

Income from steel exports saw a steep decline which is Ukraine's main export due to a rapid fall in steel prices and overall exports fell by an alarming 40 per cent which saw the country's currency, the hryvna, lose more than 20 per cent causing an acute scarcity of foreign currency and the financial turmoil saw a massive run on banks that cleaned the banking sector of $3.4 billion this month.

Ukrainian prime minister, Yulia Tymoshenko will have the unpleasant task of having to implement harsh economic austerity measures, which will not be a popular move since election is due in December and the country has been undergoing a torrid political turmoil that has plagued the country since the Western sponsored Orange revolution in 2004.

The quantum of the loan has surprised many as it was higher than the earlier estimates of between $11 billion and $15 billion which is negligible compared to the country's external debt, which analysts in London estimate at $55 billion due this year and the problem for Ukraine's balance of payments is the country's vital imports of natural gas is heavily influenced by the setting of price by Russia.

A finance ministry statement said the loan will help its central bank to shore up the country's flagging economic situation and Ukraine will have to set a balanced budget and introduce reforms to support the banking sector as the IMF has said that the loan is subject to unspecified legislative changes to Ukraine banking laws.

Standard & Poor's, the rating agency had cut Ukraine's currency rating on Friday saying that even if the IMF loan is approved Ukraine will not be in a position to implement the IMF's program to secure the economy as it lacked internal political agreement.

Dominique Strauss-Kahn said, "The authorities' programme is intended to support Ukraine's return to economic and financial stability, by addressing financial sector liquidity and solvency problems, by smoothing the adjustment to large external shocks and by reducing inflation and at the same time, it will guard against a deep output decline by insulating household and corporations to the extent possible."

Due to the ongoing global financial crisis, the IMF has said that that it provide over $200 billion loans to countries in need which includes even developed countries and additional funds can be issued through its member countries.

Each IMF member country is assigned a quota based on its size in the world economy. Under normal IMF lending program, countries can draw up to 300 per cent of their quota and the loan to Ukraine was equivalent to 800 per cent of its quota at the fund, Strauss Kahn said.

"The strength of the program justifies the high level of access," Strauss-Kahn added.

The IMF is also trying to arrange a huge credit line for countries like Brazil and South Korea, whose economies are good but are suffering from a deficient in foreign currency.