The International Monetary Fund drastically darkened its economic outlook for Ukraine on Friday as it gave tentative approval for a $3.3 billion installment of a rescue loan the country needs to avoid a total economic meltdown.
The IMF predicted the former Soviet republic’s economy will shrink by 14 percent this year, far worse than the 8 percent it had forecast earlier.
IMF mission chief Ceyla Pazarbasioglu said the fund’s board will make a final decision on allocating funds – the third installment of the $16.4 billion loan – in early August. She urged the government to push ahead with stabilization measures.
“The policies that have been implemented by the government and the Central Bank allowed the country to manage the crisis and led to stability in the financial system,” Pazarbasioglu said at a joint news conference with Prime Minister Yulia Tymoshenko.
Pazarbasioglu said the bleak economic forecast is largely attributable to a steep downturn in the first half of this year and expressed hope that the economy would pick up soon. Industrial output shrank by 32 percent in the first five months of the year, according to government data, as global demand for metals and chemicals, the country’s main export commodities, continued to decline.
The fund also revised its target for the budget deficit this year from 4 to 6 percent, mainly to account for financial troubles at the state energy company Naftogaz, squeezed by a hike in the price for Russian natural gas imports.
Pazarbasioglu said the Ukrainian authorities have committed to the unpopular measure of regularly increasing prices for hot water and heating for households in order to help cover Naftogaz’s expenses.
Tymoshenko said that $1.9 billion of the third installment will be used to cover Ukraine’s external borrowings which mature this year, seeking to allay concerns that the country would be unable to pay.
Ukraine is one of the worst-suffering countries in Europe, hit by a shrinking demand for its main export commodities. The national currency, the hryvna, has lost about 35 percent of its value to the dollar since last fall.
