Ukraine expects the International Monetary Fund to release a $3.4 billion payment under the agency’s $16.4 billion lending program to the country, Economy Minister Bohdan Danylyshyn said, according to Bloomberg.

“This will help sustain the economy and, to a certain extent, help cover the budget deficit,” Danylyshyn said today in an interview at Ukraine’s Consulate in New York. “It’s a pretty complicated situation in Ukraine, that’s why we expect (a) budget deficit this year and next.”

Ukraine is relying on the IMF loan program to stay afloat after the credit crisis undermined demand for its raw materials, including steel exports. The country has received $10.6 billion in loans to date.

The IMF team, led by Ceyla Pazarbasioglu, arrived in Kiev earlier this week to assess whether Ukraine meets the terms of the loans. Ukraine is at “serious risk” of veering off track ahead of the country’s next review in November, Fitch Ratings said in a statement on Oct. 14.

“It would be politically right to support the government’s measures aimed at stabilizing the situation,” Danylyshyn said. “That would also be a very good signal for investors.”

No Higher Tariffs

The government of Prime Minister Yulia Timoshenko “abandoned” commitments made at the second review of the country’s program with the IMF, including a failure to increase prices for natural gas paid by households and utilities, Fitch Ratings said the statement.

“I think, we have succeeded in trying to explain the situation to the IMF: If we hike the tariffs, people would simply stop paying,” Danylyshyn said. “This issue is not on time. We can get back to it as soon as in July 2010.”

Timoshenko said last week there will be no increase in natural gas rates this year.

Lower gas prices add to the country’s budget deficit, estimated this year by the IMF at 8.6 percent of gross domestic product, excluding bank restructuring costs. Fitch forecasts the deficit at 8.5 percent of GDP, or 11.1 percent including the deficit of Nak Naftogaz Ukrainy, a supplier of gas.

The deficit will shrink to about 3.8 percent next year, Danylyshyn said, adding that this year it may fall to 6 percent.

The IMF and Ukraine’s cooperation stalled earlier this year for three months while the government struggled to reach a deficit agreement.

Economic Outlook

Ukraine’s economy, while recovering from the worst global financial crisis in seven decades, may decline as much as 12 percent this year and grow 3.7 percent next year, Danylyshyn said, adding that the average prices for ferrous metals, Ukraine’s major export, may increase 5 to 8 percent next year.

The economy of the former Soviet state contracted at an annual rate of 17.8 percent in the second quarter, after shrinking 20.3 percent in the previous period.

Ukraine’s exports may rise 9.5 percent next year, while imports may be 6 percent higher, he said. The hryvnia is expected to trade between 8.2 and 8.5 to the U.S. dollar, Danylyshyn said.

The annual inflation rate for consumers may reach 12.5 percent in December, compared with earlier expectations of 9.5 percent, Danylyshyn said. Inflation may fall to 9.7 percent by December 2010, he said.

Direct Investment

The country expects to get $20 billion in foreign direct investment between next year and 2012 to help it diversify the economy away from exports of raw materials, such as steel and grains, and modernize existing facilities, Danylyshyn said.

The government plans to bolster exports by increased trade with Middle East, Asia and Africa, he said. Ukraine expects the U.S. will end import taxes on Ukraine’s metals and chemicals by the second quarter of next year, Danylyshyn said.

Ukraine’s trade deficit may narrow to $77 million, compared with $3.76 billion in the first eight months of the year, he said. The country’s trade surplus next year may reach $1.8 billion, he said.

By Halia Pavliva and Daryna Krasnolutska, Bloomberg