IMF says Ukraine loan program under threat

KIEV (Reuters) - The International Monetary Fund (IMF) said on Friday it was concerned by signs Ukraine’s parliament might reject a proposed tax code and budget for 2016, warning that this could further disrupt its $17.5 billion bailout program.

International Monetary Fund (IMF) Managing Director Christine Lagarde speaks with Ukraine's Prime Minister Arseny Yatseniuk during their meeting in Kiev, Ukraine, September 6, 2015. REUTERS/Valentyn Ogirenko

Disagreement in parliament over critical tax reforms and the draft budget has held up the disbursement of a third $1.7 billion tranche from the IMF at a time when divisions in the ruling coalition have raised concerns the government could fall.

The government has sought to compromise on its tax proposals with parliament, but the IMF said lawmakers’ discussions on Thursday amounted to an effective rejection of the reforms required under the IMF program.

“Approval of a budget consistent with the program objective of reducing the general government deficit to 3.7 percent of GDP is a key condition for the completion of the (IMF aid) program,” David Lipton, the IMF’s first deputy director, said in a statement.

“Approval of a budget that deviates from program objectives for 2016 and the medium-term will interrupt the program and inevitably disrupt the associated international financing.”

The warning follows a visit by U.S. Vice President Joe Biden last week, who in a speech to parliament urged lawmakers to put aside political differences and enact reforms without which he said Ukraine would fail to rebuild itself on transparent, democratic lines.

Nevertheless, subsequent brawls in parliament and spats in Ukraine’s ruling elite showed the deep divisions threaten to derail the reform drive.

On Friday fighting between members of the pro-European coalition in the parliamentary chamber interrupted Yatseniuk’s report on his government’s performance, while on Monday Interior Minister Arsen Avakov threw a glass of water at Odessa Governor Mikheil Saakashvili during a reform council meeting in front of President Petro Poroshenko.

With opposition parties calling for a no-confidence motion to be tabled against the government, Poroshenko released a rare joint statement with Yatseniuk and the Speaker, saying the dismissal of the Prime Minister should not be on the agenda at a time when reforms need to be passed.

The failure to pass the tax reforms and budget has held up $2.7 billion in international financing for this year, in addition to the IMF loan tranche.

Reporting by Alessandra Prentice and Lidia Kelly; Editing by Andrew Osborn and David Holmes