Welcome to the U.S.-Ukraine Business Council

Reuters, London, UK, Thursday, December 13, 2007

KYIV-Ukraine must take tackle its most serious economic problem -inflation - next year, the International Monetary Fund said on Thursday, suggesting lower social benefits and a freer currency regime as solutions.

The IMF also urged Ukraine's government to draw up a budget next year that is balanced or has a small surplus, which would also help dampen inflation.

"Next year and in 2009, measures must be taken to make sure the (inflation) situation does not become worse," IMF's Europe department chief, Robert Ford, told Radio Era in comments translated into Ukrainian.

"It could do this by reducing social benefits, because these payments directly raise internal demand and this pushes up inflation."

Inflation climbed to 14.2 percent in the first 11 months of this year, far exceeding initial government and analysts' forecasts. The central bank's monetary policy is aimed at maintaining a stable hryvnia, kept at 5.00-5.06 to the dollar.

"Talking in the longer-term, we think a more flexible currency exchange rate is necessary, which will allow monetary policy authorities to better control inflation and ease pressure on the currency," Ford said.

"I don't think you could win by tying the hryvnia to the euro instead of the dollar. It would be better if the peg is wider so the currency can fluctuate."
The central bank has a long-stated aim of gradually moving towards greater currency flexibility, but signalled recently that it will make no moves until the political situation in the country stabilises.

Politicians are yet to form a government more than two months after a parliamentary election. All parties promised higher social spending during the election campaigns.

Ford also said the IMF had no concerns about the ability of Ukraine's economy to weather a rise in gas prices from Russia to $179.50 per 1,000 cubic metres from $130 paid since the beginning of this year and $95 in 2006.

"The Ukrainian economy can handle this, because it came through fine the last time," he said.