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UPDATE 4-Ukraine parliament gives initial approval to IMF deal

Published 10/29/2008, 12:44 PM
Updated 10/29/2008, 06:58 AM

(Adds cbank action, Tymoshenko, details)

By Natalya Zinets

KIEV, Oct 29 (Reuters) - Ukraine's parliament gave initial approval on Wednesday to legislation needed to secure $16.5 billion of credit from the International Monetary Fund as the ex-Soviet state's currency plunged to historic lows.

The abbreviated, compromise package of measures was passed in a first reading in parliament, whose sitting was free of protests over an snap election for the first time in a week. The second and final reading was scheduled for Thursday.

The IMF and Ukraine last weekend clinched a preliminary agreement, seen as vital to stabilise Ukraine's financial and banking system and shield the ex-Soviet state from the effects of global financial turmoil.

Analysts have said Ukraine will have a hard time repaying its debts at a time when global lending has ground to a halt. Battered by a gaping current account deficit, its currency has weakened, making dollar debts even more expensive to service.

The current account deficit for the first nine months of this year more than quadrupled, to $8.4 billion, compared with the same period last year and an expected slowing in foreign investment will erode a past source of support for the hryvnia.

The hryvnia lost about 14 percent of its value on Wednesday, falling to a record low of 7.2 to the dollar, despite central bank intervention at 5.7. Intervention has sapped 10 percent of the bank's reserves in October.

The bank's council on Tuesday abandoned its trading band for the hryvnia after the currency remained stubbornly outside this range for months.

It said it would review the issue next year, but according to an IMF-Ukraine memorandum, cited by Interfax news agency, scrapping the corridor was one of several conditions linked the IMF loan. The central bank sought to staunch dollar demand by imposing a six-day delay for investors wishing to convert hryvnia profits, revenues or the sale of assets into foreign currency.

IMF IMPRESSED, CBANK WARNS

Parliament was deadlocked for a week over the legislation as supporters of Prime Minister Yulia Tymoshenko blockaded the chamber to prevent any debate over financing the early election called by her arch rival, President Viktor Yushchenko.

Yushchenko's supporters later failed to secure enough votes to release funding for the election. Some said they might return to the issue, which could create a new standoff in the chamber.

Central bank chief Volodymyr Stelmakh said failure to secure the IMF loan, which is contingent on adopting the financial bill, would lead to "spiralling inflation, double-digit inflation -- very high. As well as moral discredit and declaring default".

But IMF mission chief Ceyla Pazarbasioglu told reporters she was "very impressed" with plans to recapitalise banks and pursue a "very strong monetary and exchange rate policy, prudent fiscal policies".

"We think there is vision and foresight in terms of looking forward and understanding the challenges that the country may face and taking action to address those challenges," she said.

Although she declined to give the terms of the loan, she said recipients generally had a grace period of two to three years with repayment within five years at a floating rate of 3-4 percent.

She said the loan would come in tranches -- which has dismayed currency dealers scrambling to obtain increasingly rare and expensive dollars.

Stelmakh said that, thanks to the IMF deal, the hryvnia would be no weaker than 6 to the dollar by year-end.

He said Ukraine's foreign debt situation was complicated by possible demands for early repayment of corporate loans in connection with recent downgrades of Ukrainian borrowers.

The president's top economic adviser, Oleksander Shlapak, said low demand for key exports, like steel and chemicals, was likely to plunge Ukraine into recession next year.

He predicted negative growth of 2 percent and a decreased pace of industrial output to a maximum 2 percent. The government's growth forecast for 2008 stands at 8 percent. (Writing by Ron Popeski and Sabina Zawadzki, editing by Swaha Pattanaik)

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