The board of the International Monetary Fund on Wednesday approved $16.4bn bailout package for Ukraine intended to stabilise the country’s banking system and mitigate the impact of a collapse in the price of steel, one of its biggest exports, The Financial Times reported.

The Fund said the money - $4.5bn of which will be disbursed immediately – would help the authorities overcome the impact of “global deleveraging and a domestic crisis of confidence.” In return Ukraine has committed to adopt a flexible exchange rate regime with targeted intervention, recapitalise its banks, reduce its budget deficit to zero in 2009 and tighten monetary policy.

Murilo Portugal, deputy managing director of the IMF, said “The authorities have developed a strong and comprehensive package of measures to address the challenges Ukraine is facing and the Fund has provided commensurate financial assistance.”

He said the flexible exchange rate regime, backed up by intervention under some circumstances, would help absorb external shocks and avoid disorderly currency market developments.

“A pre-emptive bank recapitalization will alleviate a potential credit crunch that could prolong and deepen the downturn in economic activity,” he added. The IMF said the balanced budget target for 2009 would be kept under review.

The Ukraine rescue package is likely to be followed by another large bailout package for Pakistan in the coming days. Ukraine’s bailout totals eight times its so-called borrowing quota at the IMF and will fuel concerns that the Fund could run low on resources as more emerging economies come under stress.

Ukraine’s economy has been seen as vulnerable for some time, due to high inflation, low foreign exchange reserves relative to short term foreign debt, heavy reliance by its banks on foreign funding, balance sheet currency mismatches and a fragile fiscal position.

The collapse in the price of steel has led to a sharp deterioration in its terms of trade and its current account position, highlighting the external vulnerabilities. The spread of the global financial crisis has led to a sudden drying up of dollar and euro liquidity, along with a sharp decline in capital inflows.

The failure of Prominvest Bank, the nation’s sixth largest, prompted a run on bank deposits in October. The Ukrainian authorities were also forced to impose some exchange controls, which the IMF said Ukraine would lift as soon as confidence returned.

The US and other western nations are keen to stabilise Ukraine for geopolitical as well as economic purposes, given its important position in Eastern Europe as a neighbour of Russia.

The Financial Times


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