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15 Dec, 2009 19:29

Ukraine waits on IMF bailout funds

Debt-laden Ukraine is waiting for an answer from the International Monetary Fund. The country has asked the lender to release the final, $2 billion dollar tranche of a massive bailout loan.

Ukraine wants the international Monetary Fund to unlock the last tranche of a 16 billion dollar loan, granted in November last year. The IMF refused to release the cash, criticizing Ukraine for increasing social spending during a financial crisis.

Yaroslav Lissovolik, Chief Economist at Deutsche Bank Russia says Ukraine increases in social spending mean here are holes in the budget.

"With respect to Ukraine's budget there has been a significant increase in social obligations on the part of the State and, to a significant degree, there are additional resources coming to Ukraine, those would be used to plug in some of the holes in the budget system."

Ukraine is one of the countries hit hardest by the crisis. Its economy contracted by 20%, with an even more drastic slump in industrial production, down 30%.

The economy needs structural reform – while most of the IMF money has gone to pay gas bills. Yulia Tsiplyaeva, Chief Economist at Merrill Lynch says political volatility will count against Ukraine getting more funding in the short term.

“We doubt that the fund will provide money now. The main issue destabilizing Ukraine's budget system is not resolved and there is a high degree of political uncertainty. The IMF is unlikely to return to the negotiating table before March and maybe even later if there is more political turbulence.”

IMF money has paid for this year's gas consumption, along with subsidies to hold down domestic prices. But future IMF cash is likely to come with strings – requiring Kiev to raise prices and cut spending – and to put its finances back into balance.