UKRAINE - The International Monetary Fund has urged Ukraine to return to earlier commitments for wage and pension increases, as it argued the new social standards law passed by the parliament last month could cost up to 7% of GDP in 2010.

At the end of October, the IMF’s mission statement following the third review of Ukraine’s economic programme, in relation to its $16.4bn (€11bn) Stand-By Arrangement (SBA), noted that while its economic and financial situation was stabilising, Ukraine required “policy discipline and corrective actions in some areas” in order to maintain the gains.

The IMF revealed it was waiting for the endorsement of the agreed policy package “including assurances that the wage and pension law approved by Ukraine’s parliament, the Rada, which is at odds with the objectives of the authorities’ program, will be vetoed”.

Ceyla Pazarbasioglu, IMF mission chief to Ukraine, said it backed proposals to increase wages and pension in line with inflation, estimated to be 10%.

However, she said the organisation felt policies such as the submission of an expansionary 2010 budget and the new social standards law threatened its progress. She added funding from the IMF would be available “should Ukraine choose to go on with the programme and implement the policies needed now to build on the early gains”.

More specifically, Pazarbasioglu claimed that the social standards law passed last month “could cost as much as 7% of GDP in 2010, which is totally unsustainable. Even with a change in the law as suggested by the president — which would limit indexation to low-wage workers - we estimate a cost of as much as 2½% of GDP, a very large addition to Ukraine’s budget deficit. However you calculate it, the country simply cannot afford this”.

The president, Viktor Yushchenko, made the suggested amendments after a request from the prime minister Yulia Tymoshenko to exercise his power of veto over the Verkhovna Rada, claiming the law was being used by some political forces to drag Ukraine into economic chaos. The president instead submitted amendments to the 2009 Budget and the law on establishing a minimum wage.

But Pazarbasioglu warned: “The measure would be counter-productive, as a soaring budget deficit would threaten economic stability and the poor and vulnerable will end up paying the price. We therefore have communicated to the president that the Ukrainian authorities need to stick with their earlier commitments in this area.”

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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