Ukraine failed to persuade the International Monetary Fund to resume a $15 billion loan programme, the Fund indicated on Friday, putting at risk a key funding option for the country as it confronts a looming currency crisis. "We have decided to take a pause to enable some additional technical work to be carried out," IMF resident representative Max Alier said in a statement as its mission left Ukraine.
"Policy discussions are expected to resume in the near future." The IMF halted payouts under the programme at the beginning of this year after the government delayed unpopular reforms such as raising domestic gas prices. The government, wary of losing popularity ahead of parliamentary elections next October, refused point-blank to raise gas prices, a source close to the talks with the IMF told Reuters this week.
However, facing a balance of payments crisis and little investor appetite for its debt, Kiev will need to draw on the IMF cash again soon unless the global economy quickly improves or Russia agrees to supply its import-reliant neighbour with cheaper gas. Talks with Moscow, which have dragged on for over a year, have so far failed to yield tangible results, although Prime Minister Mykola Azarov told Reuters on a visit to Serbia that he expected to conclude them by mid-November.
Azarov said that although economic growth next year may be slower than the government's current forecast of 5 percent, the current account will be healthy due to a lower gas bill. Analysts are less optimistic and say the lack of IMF financing, supposed to boost central bank reserves by about $1.5 billion per quarter, is likely to increase depreciation pressure on the hryvnia currency .
The central bank spent over $2 billion in September to keep the currency pegged at about 8.0 per dollar while the Russian rouble lost value. Domestic hryvnia liquidity has shrunk as banks convert all funds into foreign currency.
Government bond auctions regularly fail to raise any funds, and Ukrainian spreads on global markets - 729 basis points as measured in the J.P. Morgan EMBI Plus index on Friday - make foreign borrowing prohibitively expensive. Ukraine credit default swaps, the cost of protection against sovereign default, rose 10 bps to 745 bps on Friday according to data from Markit.
The IMF deadlock also highlights Ukraine's growing dependence on Russia at a time when its ties with the European Union are strained over the jailing of former prime minister Yulia Tymoshenko. Analysts say a new gas deal with Russia would likely involve some concessions by Kiev, such as allowing Gazprom to buy into Ukrainian gas pipelines, which deliver Russian gas to Europe.
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