Ukraine bows to IMF demands, raises gas prices

Ukraine, bowing to pressure from the IMF ahead of a new loan deal, will take the painful step of raising gas prices for households from August, the government has announced.

Prime Minister Mykola Azarov said the 50 percent price hike, an unpopular move aimed at cutting the budget deficit, was necessary to secure a new $14.9bn stand-by facility from the fund.

“We have to tell people the truth. In these circumstances, we had no other choice than to agree with the IMF on financial support,” Azarov said at a televised government meeting.

“In talks with the IMF, the government defended its own vision of ways to combat the crisis and protect the people. But the creditor’s position is always stronger than that of a weakened country in need of support.”

Utilities such as gas supplies have benefited from Soviet- era subsidies in Ukraine which have kept prices at an artificially low level. Raising prices would reduce government spending on these subsidies but was likely to cause some discontent against the new administration of President Viktor Yanukovich.

The price hike will affect about 18 billion cubic metres of gas a year gas used for cooking in apartment blocks and heating in small houses. This represents a significant part of the 47-50 billion cubic metres the ex-Soviet republic consumes every year.

Tariffs for central heating, which accounts for another big slice of annual gas consumption, have not been changed yet.

Azarov said the government, which is committed to fighting poverty in the country, would widen the list of poorer households eligible for social security payments to partly offset higher gas bills.

Ukraine reached a preliminary agreement with the IMF on a new $14.9bn stand-by facility needed to plug holes in its budget.

Under the deal, it needs to reduce the consolidated budget deficit to 5.5 percent of GDP this year from the earlier projected 6.3 percent.

The Ukrainian government has to present a letter of intent to the IMF which should lead to approval of the deal by the IMF board and the unlocking of a first tranche of credit, possibly in August.