KIEV, July 15 – A senior central bank official said Wednesday the “worst was over” for the industrial sector, but the government must now prepare for the second wave of Ukraine’s crisis, which may affect banks.

Valeriy Lytvytskiy, the head of the analysis team at the National Bank of Ukraine, said securing lending from the International Monetary Fund, recapitalizing banks and cutting budget deficit would help to contain the crisis.

“The worst is over for the real sector of economy,” Lytvytskiy told Interfax-Ukraine. “The second wave of the crisis will probably target the financial sector.”

The comments underscore early signs of stabilization in the steel sector, the backbone of the Ukrainian economy, after external demand has been improving over the past several weeks.

“Steelmakers have started to cheer up in July,” Lytvytskiy said. “I think that the contraction will greatly slow down in the third quarter, and this will positively affect other sectors, such as retail and transportation.”

The comment comes after Viktor Pynzenyk, a former finance minister who quit the government in February, said there were signs of the country “little by little pulling out [of the crisis].”

The positive signs come after a disastrous contraction of the economy is the first quarter caused by the global financial crisis that had reduced demand for steel and other commodities.

Ukraine’s economy contracted 20.3% on the year in the first quarter, one of the worst such indicators in Europe. Russia’s economy, for example, contracted 9.8% on the year in the same period.

Meanwhile, Lytvytskiy warned the government must take steps to prevent possible aggravation in the financial sector from affecting the rest of the economy.

He said securing lending from the IMF was important, but also recapitalization of banks and cutting budget deficit was needed to survive the upcoming attack.

The IMF last week completed its fact-fining mission in Ukraine and has tentatively agreed to disburse $3.3 billion installment. The IMF board of directors is yet to approve the disbursement within the next four weeks.

The recapitalization of banks may stumble as measure required a legislative approval by Parliament, but the legislature has been deadlocked for the past two weeks.

Also, there was little indication that Tymoshenko has been seeking to cut budget deficit. After the talks with the government, the IMF has agreed to widen budget deficit target to 6% of the GDP, up from 4%.

But Pynzenyk said that the government will probably continue to widen the budget deficit to 14% of the GDP, or to 130 billion hryvnias, and said the policy may lead to serious risks for the economy after the crisis is over.

“These are extreme risks for the country,” Pynzenyk said in an interview with Channel 5 television late Tuesday. “These risks may continue to dominate for years.”

Pynzenyk, who resigned in sharp disagreement with the policy of Prime Minister Yulia Tymoshenko, said the government does little to improve the economy. He said the IMF lending to Ukraine over the past several months was like giving a “shot to a drug addict.”

“The steps that are being done are not enough to pull out of the crisis,” Pynzenyk said. “I understand when the drug addict is medically treated. But this is a different kind of help.”

The IMF recently worsened its forecast for Ukrainian economy to 14% contraction in 2009, compared with 8% contraction predicted earlier.

But Economy Minister Bohdan Danylyshyn, citing an IMF forecast, said earlier this week that the economy may start growing again next year. He said the economy may expand 3% on the year in 2010. (nr/ez)