November 6, 2008 / 9:09 AM / 12 years ago

IMF approves $16.5 billion Ukraine loan

WASHINGTON/KIEV (Reuters) - The International Monetary Fund approved a $16.5 billion (10.4 billion pound) loan program for Ukraine that includes monetary and exchange rate policy shifts to ease strains from the global financial crisis.

The IMF, in a statement issued late Wednesday, said it would immediately disburse $4.5 billion to the government under the two-year loan agreement.

“The authorities’ program is designed to help stabilise the domestic financial system against a backdrop of global deleveraging and a domestic crisis of confidence, and to facilitate adjustment of the economy to a large terms-of-trade shock,” the Fund said.

“The authorities’ plan incorporates monetary and exchange rate policy shifts, banking recapitalization, and fiscal and incomes policy adjustments.”

In Kiev, President Viktor Yushchenko welcomed the decision, taken after Ukraine’s fractious parliament approved enabling legislation. He said it provided a “signal to the international community to boost the rating of trust in our country.”

“The economy is getting a powerful resource to develop priority sectors and guarantee the liquidity of the banking system,” he said in a statement on the presidential Web site.

Prime Minister Yulia Tymoshenko, the president’s former ally turned rival, described the loan as a “great victory” and said it would “allow us to stabilise completely the financial situation in Ukraine.”

The IMF decision was issued along with forecast indicators predicting that Ukraine would sink into recession next year, with a 3 percent fall against 6 percent growth this year.

In a statement, Murilo Portugal, IMF deputy managing director, said Ukraine’s economy, especially its banking system, was under severe stress, caused by a drop in global steel prices, the country’s main export, and global financial turmoil.

INTERVENTION, RECAPITALISATION

He said Ukraine’s program would seek to restore financial and economic stability through a more flexible exchange rate regime with targeted interventions, so-called ‘pre-emptive’ recapitalisation of banks, and tighter monetary policy.

“The flexible exchange rate regime, backed by an appropriate monetary policy and foreign exchange intervention, will help absorb external shocks and avoid disorderly exchange market developments,” Portugal said.

“The recent unification of official and market exchange rates should increase clarity about the regime.”

Exchange controls recently imposed, he said, would be phased out as confidence returns to the economy.

Ukraine’s central bank has been intervening since early October to lift the hryvnia currency from record lows last week. It began offering buy-sell rates for currencies this week after previously only selling or buying a currency.

Portugal said as credit pressures abate, tighter monetary policy will be needed to guard against inflation.

He said the government’s target of a balanced 2009 budget would be reviewed, although it could be achieved through expenditure restraint and a phased increase in energy tariffs.

Portugal said recapitalisation efforts for banks would ease liquidity pressures that could prolong an economic downturn.

“Decisive measures that have been taken to allocate public funds to recapitalise banks and to facilitate bank resolution processes will ensure that problems can be dealt with promptly,” he said.

“A proactive strategy to resolve corporate and household debt problems will also be essential to reduce banking sector vulnerabilities.”

Editing by Andy Bruce

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