Ukraine Bailout Program from IMF

It is great news for Ukraine that just get approval from IMF for its bailout program of $17bn. The latest payment of Ukraine Bailout program has been approved on Friday, 29 August 2014. Ukraine bailout payment providing a critical boost to Kiev as it faces military, economic and political threats. The IMF said that its board approved a $US1.39 bn payment. This payment will bring total disbursements under the program to $US4.51 bn.

image source: irishtimes com

Ukraine really need this bailout program because since the early of this year, Ukraine was at risk of a prolonged recession. Deep-seated vulnerabilities added by political shocks, have led to a major crisis in Ukraine. The economic condition is in recession, while fiscal balances have deteriorated and the financial sector is under significant stress.

Ukraine problem was because Ukraine were fighting a growing Russia that backed military force along its eastern borders. Moscow has denied military involvement, blaming the fighting against Kiev on volunteers, separatist fighters and some disoriented Russian troops.
Prime Minister Arseniy Yatsenyuk this week called for swift steps to stabilise the hryvnia, the local currency, which has fallen steeply in the last year. The IMF backs a flexible exchange rate rather than the peg to the dollar that Kiev previously maintained.

This bad condition of Ukraine stability were force Ukraine to find an extension of its $17bn bailout to the help of IMF. The IMF approved the emergency funding package by the condition that Kiev agreed to a sweeping economic reform programme which designed to reduce the deficit and also promote greater financial stability. The programme includes energy market reforms, spending cuts and tax rises in an attempt to put the economy on a more stable footing. Kiev agreed a number of the policies, including a strategy of gradually increasing retail gas and heating tariffs, by 56% and 40% in 2014, respectively, and by 20-40% in 2015-17.

The government has agreed this programme to help bring the deficit down. This programme were believed able to restrain the public sector wage bill growth. This because the policies about cancelling discretionary wage increases planned for July and October this year. This will also impose a hiring freeze to reduce employment through attrition and staff optimization. While, a VAT rate reduction has been reversed.

The Washington-based fund in May, expects that Ukraine's troubled economy to shrink by 5% in 2014. This was amid of weak investor and consumer confidence. But, Ukraine will get partially rebounding in 2015 with 2% growth. However, the IMF conceded there were significant risks to the outlook. This was related to the strong trade and gas ties between Ukraine and Russia that getting crush.

A long-lasting disruption of relations with Russia that depresses exports, investment and growth, or a loss of economic control over the east that reduces budget revenue, would require a significant recalibration of the programme and additional financing, including from Ukraine's bilateral partners. There is a risk that the trade, political, and gas frictions between Ukraine and Russia could lead to strong deterioration in economic relations between the two countries. This was shown by a significant drop in Ukraine's exports to and imports from Russia. Without any effort to fix, this would likely lead to deeper and longer recession.

According to the IMF's central forecast scenario, annual growth beyond 2015 should accelerate to 4-4.5% over the medium term. IMF said that the proportion of household budgets spent on gas and heating spending in Ukraine would rise from 3-7% to 5-11%. Even though, an emerging market economists at Capital Economics, Liza Ermolenko and William Jackson, said that while the $17bn bailout should ease concerns of an immediate crisis.  They explained that the short-term pain stemming from the programme could well be greater than most expect. With this all coming against the backdrop of a central government losing control of its eastern provinces, the risk of a messier outcome is still large.