Ukraine's central bank moved to shore up the country's battered currency Tuesday by hiking interest rates to 30 percent as the government pushed through draconian reforms needed to clinch another IMF bailout. The bank said the eye-popping jump in the benchmark refinancing rate, from a current 19.5 percent, was aimed at "stabilising the macro-economic situation" pending the IMF's decision on a $17.5-billion loan needed to save Ukraine from bankruptcy.
The rate change takes effect Wednesday. Ukraine's currency and economy have tanked over the past year as government forces fight a bloody war with pro-Russian separatists in the east. The hryvnia has lost 80 percent of its value against the dollar since the start of the conflict, falling to a record low of 33.75 to the greenback last week before climbing back to 24 on Tuesday.
London-based Capital Economics research company called the interest rate increase a "last-ditch attempt to regain control of the currency". Inflation in January stood at 28.5 percent year-on-year. Spiralling prices have sparked a run on basic goods, such as flour and sugar. Securing another IMF rescue - the second since the revolution that ousted pro-Russian president Viktor Yanukovych last year and triggered a pro-Moscow insurgency in the east - is seen as crucial to averting a default.
On Tuesday, Ukraine's energy commission announced a more-than-threefold increase in the price of household gas, one of the measures demanded by the fund. The stinging increase came hot on the heels of parliament's adoption Monday night of a series of spending cuts, including a controversial 15 percent cut in the pensions for the many retirees who continue working to supplement their meagre benefits. Laying it on the table for the opposition Monday, Prime Minister Arseniy Yatsenyuk declared baldly: "We are now in a situation where we have no easy solutions."
MPs also voted to cut the funding of state oil and gas company Naftogaz and to tackle fraud, Economy Minister Natalie Jaresko announced. "Those who committed fraud or criminal activities leading to bank failures can now be brought to justice and held accountable," she said in a Facebook post. Ukraine's government has forecast the economy to remain mired in a deep recession this year, contracting by 5.5 percent.
All eyes are turned to the IMF, which is expected to approve the loan at a meeting on March 11. Much of the package, which is part an international aid package expected to come to around $40 billion over four years, will go towards boosting Ukraine's gaping foreign currency reserves.
In January the country of 45 million people had only $6.4 billion left in reserves, only about enough for a month's worth of imports. Capital Economics said it expected the IMF package "to tide Ukraine over for the next couple of years." "But there's clearly an urgent need for Ukraine to receive the financing soon." But "without a lasting and peaceful resolution to the conflict in the east", the economists warned, "capital flight will persist."
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