UPDATE 1-IMF says it must monitor Ukraine's economy more closely

Mon Jul 29, 2013 6:56pm EDT

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By Anna Yukhananov

WASHINGTON, July 29 (Reuters) - The International Monetary Fund said on Monday that Ukraine must participate in post-program monitoring because of its relatively large debt to the Washington-based lender, subjecting its economic policies to greater scrutiny.

The IMF said the enhanced monitoring was triggered by its rules, but it could also be a sign that the Fund is worried about Ukraine's ability to pay back the $8 billion it owed the IMF at the end of June.

The IMF froze a $15 billion standby credit program with Ukraine in 2011 after Kiev reneged on commitments to raise domestic gas prices. The program officially expired last December.

Ukraine received only two disbursements before the program went off track, totaling about $3.4 billion.

The IMF's board decided Ukraine must still participate in the monitoring given the size of its debts to the IMF in relation to the size of the European nation's economy, the Fund said on Monday.

The IMF usually reviews the economies of each of its 188 members once a year. But countries that received aid packages may have more frequent discussions with the Fund to ensure they can still repay their debts. The IMF may choose to step in with advice if it is worried about a country's debt or policies.

The IMF said its extended monitoring of Ukraine's economy will take place at the same time as Kiev's regular economic health check in the fall, and the IMF's board plans to discuss the findings in December.

A Reuters poll earlier this month showed Ukraine's economy will not grow significantly in 2013, despite optimistic government forecasts, as long as steel production continues to fall.

Ukraine is also one of several emerging market economies at risk of a balance of payments crisis due to severely depleted central bank reserves, according to data from Bank of America Merrill Lynch.

According to the data, Ukraine only has enough reserves to cover three months of imports, putting it at risk should foreign financing suddenly dry up. The reserves are also insufficient to cover debt maturing before mid-2014.

Analysts and other donors have called on Ukraine to resume cooperation with the IMF and improve its business climate in order to attract more foreign investment.

Ukraine and the IMF launched talks early this year to nail down a new aid package, but the Kiev government has found alternative lending sources on external markets and has indicated it does not require fresh IMF funds yet.

The IMF last week said it has not discussed details of a new program for Ukraine since April.

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