IMF Warns Ukraine On Possible Credit Halt If Loan Terms Not Obeyed

KIEV, Ukraine -- The International Monetary Fund (IMF) warned Ukraine to keep to previously-agreed loan terms or risk a loss of badly-needed credits, a senior government spokesman said Monday. "The fund is insisting all the money loaned us go to our banking system," said Oleskander Shapak, a top economic advisor for President Viktor Yushchenko
"They have told us there can be no (Ukrainian domestic) political games with the loan terms," Shapak said, citing a formal message sent from IMF Ukraine mission head Ceyla Pazarbasioglu to Yushchenko over the weekend.An IMF team, after a visit to Ukraine earlier this month, failed to approve the issuance of the second tranche of a $16.5 billion dollar loan to the former republic, which had been scheduled for February 15.Ukraine's parliament had recently refused to pass a balanced budget, and money from the initial $4.5 billion dollar tranche sent Ukraine in November was not being focused on the former Soviet republic's banking sector, IMF officials charged at the time.The IMF warning sent to Kiev by Pazarbasioglu criticised line items in Ukraine's national budget bill for not specifying IMF loan money be used only to support Ukraine's banking sector, a violation of IMF loan terms agreed to by Kiev, Shapak said.A long-running feud between President Yushchenko and Prime Minister Yulia Tymoshenko has stymied most Ukrainian efforts to respond to a dramatic economic slowdown, with Yushchenko supporting hands-off monetary policy and reductions in state spending; and Tymoshenko calling for massive government intervention in industry, and state support to the national currency the hryvna.The pair are deeply divided on Kiev's relations with the IMF, with Yushchenko calling for close Ukrainian adherence to IMF loan conditions; and Tymoshenko supporting redirection of already-received IMF money to social service programmes, and flirting with Russia as a possible creditor in case of an IMF loan halt.Ukraine has been heavily hit by the world financial crisis, with GDP expected to contract in 2009, along with spikes to inflation and unemployment. Anti-government demonstrations have accelerated as the country's economy has worsened, with 2,000 Communists gathering in the capital Kiev on Monday to demand Yushchenko quit office immediately.Independent analysts in Ukraine generally agree the government is close to default - a situation that might well go critical were the IMF to refuse further cash infusions.Ukraine's current account budget deficit is some $5.5 billion dollars. High fuel prices and delayed foreign debt now coming due is likely to worsen the situation, observers said.Ukraine Finance Minister Viktor Pinzenyk handed in his portfolio on February 12 over the government's programme to control the ballooning budget deficit, saying he "could not continue while abandoning principles of a balanced budget, deficit control, and avoiding living on credit."