(Adds analysts, details)
By Sabina Zawadzki and Lesley Wroughton
KIEV/WASHINGTON, Oct 26 (Reuters) - The International Monetary Fund and Ukraine said on Sunday they had reached an agreement in principle for a $16.5 billion 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 focused 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.
Analysts said they did not expect news of the IMF loan to help Ukraine’s fledgling stock market which has fallen 60 percent since the start of September when investors rushed from emerging markets. Bonds may do better, they said.
The IMF statement said nothing about the conditions it sought from Ukraine. But a joint central bank and finance ministry statement said the government would have to draw up a balanced budget and introduce measures to support banks.
“These include legislative changes which must be adopted very soon by Ukraine’s parliament,” the statement said.
Parliament, which has a long history of fractious behaviour, has been in disarray for the past week.
President Viktor Yushchenko dissolved the chamber this month after the collapse of a coalition of groups led by him and his estranged ally and now rival, Prime Minister Yulia Tymoshenko. The premier opposes the election.
The president called a December election, but suspended his decree last week to enable parliament to sit and approve financial legislation that include the IMF’s demands.
But the prime minister’s supporters blocked proceedings to prevent passage of any measures to finance the December poll. It is not certain now when it will take place. Parliament is next due to meet on Tuesday.
Competing packages of financial measures have been drawn up and it is not clear if either of them meet the IMF’s conditions.
One package submitted to parliament failed to balance this year’s budget. It extended sovereign guarantees to companies borrowing abroad, set out plans for government’s own borrowing and barred troubled banks to pay out dividends.
“Judging by the (loan) figure, this is definitely something that allows the recapitalisation of the banking system,” said Katya Malofeeva, chief economist at Renaissance Capital. “This requires quite a bit of preparatory work and the bills submitted last week definitely didn’t include that much detail.”
She said two to three weeks would probably be required to approve the measures and passage was made more complicated by the unpredictable behaviour of Ukrainian politicians. (Editing by Elizabeth Piper)