Ukraine faces financial meltdown if it fails to stabilize its budget deficit, rationalize state borrowing and restructure its gas sector, the political opposition’s economics spokeswoman told Emerging Markets.
Irina Akimova of the Party of Regions warned that the budget deficit is likely to reach 8% of GDP this year – despite assurances to the IMF that it would be held to 3%.
Prime minister Yulia Timoshenko’s government failure to balance the budget, or to tackle the web of debts at the national oil and gas company Naftogaz, would result in a combination of greater state indebtedness and inflation, Akimova said.
“The priority is to bring the budget deficit under control, and then to stabilise the sovereign debt position”, Akimova said in an interview. “Next, a law-based and transparent approach must be adopted to restructuring the banks.
“Third, the situation at Naftogaz must be taken in hand, and plans made to restructure the company. Without this the budget deficit will never be managed properly.” This issue has also been raised by the IMF, which says the firm’s accounts must be more transparent, with its transit, supply and distribution businesses treated separately, and that domestic gas prices must be increased.
Akimova continued: “Finally, consideration must be given to infrastructure projects and other means for stimulating economic recovery. Our exporters have lost heavily in foreign markets as a result of the downturn, and the indications are that the slump is continuing.”
Akimova, a parliamentary deputy for the Party of Regions led by Viktor Yanukovich, which has its electoral base in Russian-speaking areas of eastern Ukraine, believes that the Timoshenko government will fail to meet targets set in its memorandum of understanding with the IMF.
“First of all, the IMF called for a reduction of the budget deficit”, she said. “It’s now 4% of GDP, and the government has announced a target of 3% of GDP – but it is doubtful that this will be achieved. In fact the deficit is likely to reach about 8% of GDP. This is the biggest problem.”
Fiscal looseness could help to produce “aggravated inflation” – with the consumer price index continuing to rise at 17-18% next year – Akimova warned. Attempts to raise money on the domestic market could put further pressure on the hryvna and send Ukraine’s finances into a downward spiral.
The government has also mismanaged banking sector restructuring, Akimova argued. The scheme suffered from a “lack of transparency”, and the long-term freezing of accounts would diminish popular trust in the system.
Pessimism over Ukraine’s finances deepened this week when Moody’s downgraded local currency bond ratings to B2 from B1, with a “negative” outlook.
Moody’s said there is uncertainty over capital controls, apparently a reference to Alfa Bank Ukraine’s technical default last week, which occurred when it faced difficulty in buying sufficient dollars to repay a bond. The central bank last month ordered all foreign currency transactions to be completed within a day of being struck, and imposed limits on which banks it would sell foreign currency to.