The International Monetary Fund has agreed to throw Ukraine’s sinking economy a lifeline worth up to $18 billion provided the country adopts severe austerity measures.
After two weeks of emergency talks the IMF announced on Thursdaypreliminary agreement to give Ukraine between $14 and $18 billion in loans over the next two years.
The IMF’s board must still approve the package once the Ukrainian Parliament passes a set of laws on painful and highly unpopular reforms. If Ukraine honours its end of the deal it could receive the first installment as early as April.
Even before the IMF talks began Acting Prime Minister Arseniy Yatsenyuk had said the government had “no other choice but to accept the IMF offer”.
“The country is on the edge of economic and financial bankruptcy”, Mr. Yatsenyuk told the Parliament on Thursday. “This package of laws is very unpopular, very difficult, very tough. Reforms that should have been done in the past 20 years”.
Under the IMF deal Ukraine will have to cut the budget deficit, raise taxes, shift to a flexible exchange rate and increase retail energy tariffs toward their full cost.
Floating the hryvnia will push up inflation, while hiking gas prices will place a heavy burden on family budgets as gas is universally used in Ukrainian households for cooking and heating.
State energy company Naftogaz announced this week that household gas prices would rise 50 percent beginning May 1. Some experts said the gas prices may later have to double to meet the full cost recovery condition.
Income tax rates would rise from 15-17 percent now to up to 25 percent.
Mr Yatsenyuk told lawmakers that Ukraine’s economy will contract by 3 percent and inflation will rise up to 14 percent.
The IMF deal will unlock about $10 billion in aid from the European Union, the United States and other countries.
Ukraine's Finance Ministry has said it needs $35 billion over the next two years to avoid default.
Russia has put on hold a $15 billion aid package it pledged to ousted President Viktor Yanukovych and has withdrawn gas price discounts to Ukraine. The price of Russian gas is to nearly double to $480 per 1000 cubic metres on April 1.
The harsh economic measures may further weaken the Ukrainian new authorities’ shaky grip on power ahead of presidential elections scheduled forMay 25.
Meanwhile. former Prime Minister Yulia Tymoshenko, released from jail last month after Mr Yanukovych was overthrown, announced on Thursday she would run for president.
Ms Tymoshenko, the 53-year-old fiery leader of the 2004 “orange revolution”, served twice as prime minister and ran for president in 2010, losing to Mr Yanukovych in a run-off vote. She served two years of a seven-year term for abuse of office.
In a leaked phone call earlier this week Ms Tymoshenko said the eight million ethnic Russians in Ukraine should be “nuked”.
Commenting on Crimea’s referendum on splitting from Ukraine she said:
“It’s about time we grab our guns and go kill those damn Russians together with their leader”.