KIEV: The International Monetary Fund warned that recently proposed legislation in Ukraine threatens to undermine reforms critical to the success of a $40 billion bailout package for the country.
Poul Thomsen, director of the IMF’s European department, said in a statement that seven pieces of legislation up for review in Ukraine’s parliament next week could roll back important reforms on pensions and energy tariffs that Ukrainian lawmakers passed earlier this year.
The fund also condemned a separate law passed by parliament earlier this month that would allow Ukrainians to repay foreign currency loans at a more favorable exchange rate, a move some experts have said could collapse the country’s banking system. President Petro Poroshenko has signaled he will veto the foreign-exchange bill.
The IMF’s concerns come as Ukraine continues to struggle with a buckling economy, as the armed conflict with Russia- backed rebels persists in the country’s east. Ukraine’s government expects the economy to shrink by 9.5% this year, with annual inflation likely to reach 48% compared with the previous year.
The legislative proposals that have prompted censure from the IMF show how lawmakers could easily roll back unpopular reforms in the interest of short-term relief for a beleaguered public, jeopardizing Ukraine’s already shaky economic recovery plan.
A spokesman for the president confirmed that he was prepared to veto the law.
So far, Ukraine has delivered on a number of key reforms demanded by the IMF. In April, gas prices to households nearly tripled and electricity costs rose by an average of 50%, as the country complied with the fund’s demand to end generous energy subsidies. Lawmakers passed pension cuts and tax increases in March, too. Ukraine has received $5 billion of a $17.5 billion pledge from the fund.
But international experts have rushed to condemn recent moves by the government, particularly the controversial law passed on July 2 regarding foreign currency loans. The law would allow borrowers to repay loans at an exchange rate of 5.05 hryvnia to the dollar, rather than the current exchange rate of 21.9 hryvnia to the dollar. The National Bank warned that the law would push the banking system toward collapse by draining it of 100 billion hryvnia ($4.6 billion).
The bill was passed with 229 votes, three more than necessary. While the president condemned the law as the work of ” populist politicians,” some of his prominent allies voted in favor, including parliament speaker Volodymyr Groisman. Mr. Groisman later said in a Ukrainian television interview that he had voted in favor because he hadn’t had time to read the latest draft of the bill.
On Sunday, the IMF warned that the foreign-currency law, as well as the seven proposed bills, threaten to derail progress made earlier this year. The fund said that if implemented, they could reduce Ukraine’s gross domestic product by 2% in the remainder of 2015 and 3.5% in 2016.
“Reversing economic reforms for the sake of short-term gains has been detrimental to Ukraine’s economy in the past,” Mr. Thomsen said. “Ukraine needs to stay on the course of reforms, economic modernization and responsible macroeconomic policies.”
The seven laws criticized by the IMF were all written by Fatherland, an opposition party led by former Prime Minister Yulia Tymoshenko. They included wage indexation, eliminating taxes for pensioners who are still working, and a reduction on royalties for local energy production companies.
