Ukraine agrees budget with IMF

KIEV (Reuters) - Ukraine expects to have a new International Monetary Fund programme in place in May and has agreed on the size of the budget deficit, seen as a key sticking point in talks, Prime Minister Mykola Azarov said on Friday.

An IMF mission visited Ukraine this week for talks on resuming a suspended $16.4 billion (10.7 billion pounds) bailout that is seen as vital to restoring investors’ confidence in the cash-strapped ex-Soviet republic.

The Fund said on Friday that progress had been made, but outstanding issues on fiscal policy remained and would be discussed in coming weeks.

The size of the 2010 state budget deficit had been one key problem, with the Fund pressing for fiscal prudence and Ukraine’s new leaders committed to social spending initiatives.

“We have reached an agreement on the key issue of the state budget. We have agreed that the state budget deficit could be within the limits of around 6 percent (this year),” Azarov told reporters.

“A memorandum will be prepared in April and then will be signed. After that the board of directors meeting on a new programme will take place. We expect that in May we will resume the cooperation with IMF,” he added.

Kiev officials had indicated they were seeking a deficit figure of 10 percent of gross domestic product (GDP), suggesting the IMF had won concessions from the government on the headline number.

In 2009, the deficit was around 14 percent of GDP, Azarov said, acknowledging that the 6 percent target would not be easy. “We agreed that ... it was an internal matter for Ukraine and the government how it will guarantee such a deficit,” he said.

Meeting monthly bills of $700 million for imports of Russian natural gas and reform of the state energy firm Naftogaz, which sells gas to utilities at home for less than it pays for it, are two big factors weighing on the budget.

The Azarov government says it aims to pitch its 2010 draft budget to parliament for a first reading in mid-April.


Some $6 billion of the suspended IMF package is yet to be distributed to Ukraine, whose economy shrank 15 percent in 2009. The programme was suspended late last year when then President Viktor Yushchenko approved a rise in minimum wages and pensions despite earlier undertakings to the IMF not to do so.

Negotiations resumed with the election of Viktor Yanukovich as President in February. Ukraine’s new leaders have signalled that resuming cooperation with the IMF is a priority, but they also want to go ahead with social spending plans.

It was not clear if the sides had agreed to a resumption of the present suspended programme or whether they were talking of a new programme altogether.

Hopes of more cash from the IMF have cheered investors, sending yields on Ukraine’s 2016 dollar bond below 7.5 percent -- levels not seen since mid-2008 -- and boosting demand at auctions of domestic debt.

In a statement issued on Friday, IMF resident representative in Kiev, Max Alier, said the IMF mission had found signs of a “gradual resumption of growth.”

The current account deficit had narrowed, the hryvnia currency was “broadly stable” and core inflation, though still comparatively high, was falling, he said.

He said the mission had made progress in discussing ways of strengthening confidence in the banking system but a number of outstanding issues -- notably relating to fiscal policy -- remained and would be discussed in coming weeks.

Reporting by Natalia Zinets; writing by Toni Vorobyova and Richard Balmforth; editing by Patrick Graham