IMF and Ukraine agree on loan deal

By Sabina Zawadzki and Lesley Wroughton

KIEV/WASHINGTON (Reuters) - The International Monetary Fund and Ukraine said on Sunday they had reached an agreement in principle for a $16.5 billion (10.4 billion pounds) loan package to ease the effects of the global financial crisis.

But analysts said politicians would have to set aside differences to adopt a set of financial measures needed to clinch the deal and secure the loan. The former Soviet republic is in the throes of the latest bout of political turmoil that has gripped it since the 2004 "Orange Revolution."

With Ukraine facing its third parliamentary election in as many years, the hryvnia currency has slumped to a record low. Analysts are concerned over the ability of the government, firms and banks to refinance with global lending at a standstill.

The economy is expected to slow dramatically as prices fall for steel, Ukraine's major export, and energy costs climb. Foreign investment is also expected to drop, compounding the pressure on the currency by a current account gap.

"The IMF is moving expeditiously to help Ukraine, and this programme is focussed on the essential upfront measures needed to maintain confidence and economic and financial stability," IMF chief Dominique Strauss-Kahn said in a statement.

Analysts welcomed the deal and said the $16.5 billion to be made available over two years was adequate, but only for now.

"In terms of the figure, it's on the higher side of what was mentioned by key politicians in Ukraine. However, this is not such a big fund that it will solve all the problems in one swoop," said Martin Blum, head of EEMEA Economics and Strategy at UniCredit bank.

Ukraine can use the funds to bolster the central bank's reserves -- which it is now spending to stop the currency from sliding further -- and to prop up the banking sector.