KIEV, July 28 – The International Monetary Fund on Tuesday approved disbursement of a $3.3 billion installment to Ukraine, easing concerns that the country may default on foreign debts.

The latest disbursement increases to $10.9 billion the amount of money that the IMF has provided to Ukraine over the past nine months, helping the country to deal with its severe economic crisis.

“The revised economic program continues to seek to mitigate the effects of the global crisis, restore confidence in the banking system, and preserve fiscal sustainability,” John Lipsky, the first deputy managing director at the IMF, said.

Ukraine’s economy contracted 20.3% on the year in the first quarter, one of the worst such indicators in the world, after external demand for steel, the country’s main export commodity, had plunged.

The IMF executive board also approved modification of a performance criterion on the fiscal deficit in response to broadening of the fiscal deficit target to include the deficit of Naftogaz Ukrayiny.

The IMF praised the government for reducing non-priority expenditures and for taking a “number of steps” to restore viability in the natural gas sector.

“A key step is a schedule of natural gas price increases to bring domestic prices in line with international prices,” Lipsky said.

The approval of the installment comes days after he National Commission for Power Regulation, Ukraine’s energy sector regulator, announced it will increase by 20% domestic prices of natural gas starting from September 1.

The price hike will affect households and will be followed by a similar 20% hike in gas prices paid by power generators and heat producers on October 1, the commission reported.

The prices will again increase 20% from January 1, 2010, and will keep increasing 20% each quarter until domestic prices reach the level of prices of gas imports, according to the commission.

The prices hikes are aimed at improving finances at Naftogaz, which has been facing 27 billion hryvnia in losses this year because the government has been refusing to adjust domestic gas prices to the level that Naftogaz pays for gas imports.

The Washington-based lender also praised the National Bank of Ukraine for running “adequate” monetary policy.

"The monetary policy stance is adequate. The NBU will closely monitor developments in monetary aggregates and stands ready to tighten its policies if inflation or exchange rate pressures were to reemerge,” Lipsky said.

The NBU has taken measures to increase currency flexibility in both directions, including by amending regulation to allow foreign exchange forward transactions.

“Further progress in this area will help Ukraine to adjust better to external shocks, discourage dollarization and excessive risk taking by un-hedged borrowers, and allow monetary policy to focus on inflation objectives,” Lipsky said.

The IMF also said that the government must watch carefully the banking sector, which is essential for the economic recovery.

"Restoring confidence in the banking system, which is essential to facilitate the economic recovery, remains a key priority,” Lipsky said. “Recent important steps include the recapitalization of the systemic banks, the decisions taken with regard to two other banks, and the adoption of legal amendments to enable the resolution of non-systemic banks.”

"The authorities plan to phase out remaining import restrictions in line with their commitments under the program,” he said.

"Going forward, close adherence to the program will be key to create the conditions that facilitate an expeditious economic recovery," Lipsky said. (tl/ez)