KIEV, Oct. 6 – Parliament, led by the opposition Regions Party, on Tuesday gave preliminary approval to a bill that dramatically increases social payments and may potentially have a devastating effect on Ukraine’s finances.

The bill is a major setback for Prime Minister Yulia Tymoshenko, whose government has been struggling to make regular social payments as the economy has contracted 20%.

The bill - if approved in the second reading and signed into law - would dramatically widen budget deficit, and would be just another reason for the International Monetary Fund to postpone its lending to Ukraine.

“This is not simply populism,” First Deputy Prime Minister Oleksandr Turchynov said. “It’s a systemic work aimed at complete destabilization of the financial system of Ukraine.”

Ukraine depends on the IMF’s $16.4 billion loan for being able to pay foreign debts this year and next, but officials have speculated the Washington-based lender may postpone the next $3.1 billion installment.

The government of Tymoshenko has failed to fulfill five out of six conditions for the installment, but the dramatic widening of the budget deficit would most likely force the IMF to suspend the lending.

“This may completely destroy the hryvnia and to unbalance finances in Ukraine,” Turchynov said.

The bill won support from 259 lawmakers in the 450-seast Parliament, with at least two pro-government groups – the group led by Parliamentary Speaker Volodymyr Lytvyn and Our Ukraine-People’s Self-defense - also backing the legislation.

The second reading of the bill is expected on Thursday as lawmakers have decided to work fast for the approval of the legislation, according to Hanna Herman, a lawmaker from the Regions Party.

“We will approve this bill in the final reading quickly and plan to get back to the issue on Thursday,” Herman said. “In other words, we will do our best to make sure that people feel results of our work as soon as possible”

The bill is widely considered to be politically motivated aimed at making the life more difficult for Tymoshenko, one of leading candidates for the presidential election due January 17, 2010.

The government this year collects 20% less money then has been originally planned due to the economic contraction, but Tymoshenko has been able to survive politically mostly due to the bailout lending from the IMF.

But the fate of the next installment from IMF is unclear after the government has failed to implement five out of six conditions since the last tranche of $3.3 billion has been received late July.

Deputy Prime Minister Hryhoriy Nemyria met IMF deputy managing director John Lipski in Istanbul on Monday to stress that the bailout was “extremely important” for the country. (tl/ez)